Last night, the Knesset Research and Information Center published a comprehensive research study of the food industry in Israel, the main part of which is unequivocal statistics concerning the increase in food prices in Israel in comparison with European countries.

"The rise in food prices in real terms between 2005 and 2010 was 12.7% in Israel, compared with 3.6% in the countries of the Europan Union, and 1.1% in the euro-block countries," the report states.

The study, which was commissioned by the Knesset Economic Affairs Committee, also includes interesting data on the dairy foods market, which was the catalyst for the recent effective consumer protest over cottage cheese prices - the first of its kind in Israel.

The study shows that the Israeli food industry had revenue of NIS 56 billion in 2010, which comprises about 17% of the entire industrial sector. About 95% of food industry revenue results from domestic consumption, and 5% from export. In the industrial sector as a whole, about 60% of production goes to the domestic market, and 40% for export. The food industry employs about 61,000 workers, about 15% of the total number of people employed in industry.

The data indicate that the sector is highly concentrated: about 1,700 factories engage in food production, however, the five largest factories account for 44% of the revenue for the entire sector. The five leading companies have 44.1% of the market share; the nine leading companies have a market share of 57.3%; and the 25 leading companies have a market share of 73.8%.

In the dairy market, the concentration is even higher. The study shows that Tnuva Food Industries Ltd., the dairy market leader, has a turnover of NIS 4 billion and a market share of 70%.

This high level of concentration, in which Tnuva and Strauss Group Ltd. (TASE:STRS) control 82%-99% of products in most categories, is presumedly one of the main causes of the rise in prices from 2005 to May 2011.

A few products had sharp rises in price: yogurt (46.2%), cottage cheese (41.3%) and white spread cheese (32.3%). The authors of the study say they contacted the dairy producers in an effort to gather information about production costs - "However, the companies have not complied, citing commercial confidentiality." Therefore, the authors have had to rely on the session of the Economic Affairs Committee that took place on June 19, 2011, at which time the Tara CEO provided data on the components of cottage cheese prices.

According to Tara's figures, during the period under review, cottage cheese prices rose 51%, whereas the price for raw milk rose 27.8% and other production expenditures (such as labor) rose 66.3%.

The researchers write: "The main cause of the rise in retail prices, according to Tara's data, is the retailers, that have increased their profit margin from NIS 0.65 per product to NIS 1.54 per product - an increase of 136.9%. However, it must be noted that Tara's market share in the cottage cheese category is relatively small. Tnuva is the market leader, and it is reasonable to assume that Tnuva's production costs are lower thanks to economies of scale, and hence the leading producer's profits grew markedly."

Published by Globes [online], Israel business news - www.globes-online.com - on July 4, 2011

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