Chapter 12. Israel
Support to agriculture
Despite efforts to introduce market-oriented reforms, the overall agriculture policy support has remained stable from 2015 to 2017, due to the persistence of regulations, price controls and border protection targeting specific commodities.
The share of producer support in gross farm receipts (%PSE), 17% in 2015-17, is approaching the OECD average. At the same time, the share of potentially most market-distorting forms of support in Israel is much higher (93%) than the OECD average. Poultry and milk producers benefit from the highest level of market price support, accounting for 48% of the total PSE in 2015-17, up from 41% in 1995-97. Input subsidies increased between 2015 and 2017, mainly due to changes in water policies. Total support for agriculture (TSE) has remained stable at 0.5% of GDP, just below the OECD average.
The share of General Services Support Estimates (GSSE) in total support in 2017 represents 12.5% of TSE, close to the OECD average; it includes more infrastructure investment, reinforced inspection and control, and some additional support for the Agricultural Knowledge and Innovation System.
Main policy changes
Several measures have been undertaken to improve market linkages and increase competition in the agro-food chain, aiming in particular to lower food prices. The government approved thirteen programmes to reduce the regulatory burden in the agro-food chain. Several initiatives were launched to encourage greater competition in marketing of and consumer access to local and fresh horticulture produce. The government gathered market data from large retailers and wholesalers in view of introducing possible margin controls on fruits and vegetables. While target prices for egg, milk and wheat increased, the government continued its programme to open the beef market in exchange for area-based support linked to pasture land, and the duty free quota for cheese was increased by 10%.
The Water Authority published the implementation rules for the new agricultural water pricing system. Freshwater rates for producers in areas with no alternative water source will amount to ILS 1.54 (USD 0.43)/m3, while other producers will pay the difference between a rate of ILS 1.81 (USD 0.5)/m3 and the calculated cost of pumping they face, both by June 2019. Meanwhile, the country’s Northern regions faced its fifth year of drought, which led the Water Authority to further restrict water allocations and to disconnect water supplies coming from the “Kinneret surrounding” region from the rest of the country, increasing the its reliance on desalinated water.
Assessment and recommendations
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The level of support to agriculture in Israel continued to be stable in the period 2015-17, just as the OECD average declined. This evolution reflects the continued high border protection for selected agricultural commodities and various forms of support for farm inputs. Such a structure of support effectively taxes consumers.
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While the tariff reform in the beef sector is a step in the right direction, its scope should be expanded to cover other commodities. Israel maintains very high tariffs for goods such as dairy products, eggs and certain fruits and vegetables that could also be gradually removed and replaced, if necessary and as a temporary measure, by direct payments. The tariff system on agriculture should also be simplified, avoiding non-ad-valorem tariffs.
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Israel should continue and intensify its ongoing efforts to diminish the regulatory burden and improve the transparency and competition in the agro-food chain. Progress made in these areas would not only reduce trade costs and encourage trade flows, but would also diminish costs for the processing industry and final consumers of agro-food products.
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Israel’s estimated annual growth rate of total factor productivity in agriculture is higher than world average, thanks to advances in technology due to research and development, high managerial skills of Israeli farmers and effective public extension service. Expenditures on agricultural knowledge and innovation system should continue to increase.
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Israel’s comprehensive water management system has enabled the country to sustain a productive agriculture sector under very intense water stress. Still, the recent agriculture water price reform, aiming at equity, may reduce the degree of freedom of the government to manage future freshwater use in agriculture. By applying flat water rates, the system does not allow freshwater prices to reflect regional differences. It leaves water allocation restriction as the main remaining policy instrument adaptable to regional climatic conditions, making the water system less flexible in a context of increasing climatic volatility. Facilitating further trading in water allocations could help improve the system’s efficiency and flexibility.
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The government has invested in agriculture’s resilience to natural and climate risks, but it should continue its efforts to reduce the sector’s negative environmental impacts. Improvements should be sought to converge to OECD-levels for nutrient balances. Regional agri-environmental programmes should be bolstered, and complemented by other targeted policies geared towards higher environmental performance.
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Source: OECD (2018a), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en.
Support to farmers (%PSE) has declined moderately over the long term. In the most recent period, support has been around 17% of gross farm receipts, slightly under the OECD average. The share of potentially most distorting support has increased in the last two decades due to a higher level of market price support (MPS) and continued border protection (Figure 12.1). The level of support has slightly decreased (-1%) in 2017 due to a small reduction of MPS. This in turn results from a significantly reduced agricultural production, which is almost entirely offset by an increased average price gap (Figure 12.2). Effective prices received by farmers, on average, are still 16% higher than world prices; large differences between commodities persist with domestic prices for poultry and bananas being 65% and 101% above world prices, respectively. MPS is the main component of Single Commodity Transfers (SCT): bananas, milk and poultry have the highest share of SCT in commodity gross farm receipts (Figure 12.3). Overall, SCT represent 85% of the total PSE. The expenditures for general services (GSSE), mainly on knowledge and infrastructure, have declined relative to agriculture value added over twenty years. Total support to agriculture as a share of GDP declined significantly over time. 88% of the total support is provided directly to farmers (PSE).
Source: OECD (2018a), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en.
Source: OECD (2018a), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en.
Contextual information
Israel’s economy is relatively small but has been growing rapidly and its GDP per capita almost doubled over the last two decades, just as population increased by 50%. The share of agriculture in total employment and in GDP has fallen to around 1%. Israel is unique amongst developed countries in that land and water resources are nearly all state-owned. Jewish rural communities, principally the kibbutz and moshav, accounting for about 80% of agricultural output. Partly due to this structure, agricultural area has remained relatively stable over the past twenty years, despite the country’s continued development. While the agriculture production sector is relatively diversified, most of the value of production and exports is generated by high value fruits and vegetables.
Israel maintains a highly performing economy among OECD countries, with robust GDP growth, exceeding 2% annually, and close to full employment in 2017. After two years of deflationary pressure, inflation started again in 2017 (Figure 12.4). The appreciation of the Israeli currency compared to the US Dollar and the Euro from 2015-17 has affected the overall competitiveness of the economy (OECD, 2018b).
Partly because of these monetary changes, the agriculture trade balance of Israel continued to decline in 2015-17 with the value of imports of mostly processed food products increasing and the value of exports of mainly primary commodities declining.
Source: OECD statistical databases.
Israeli agriculture is highly productive. Despite a decline from the 1990s, the estimated 2.5% annual growth rate of total factor productivity (TFP) in agriculture over the period of 2005-14 remains much above the world average. The long-term increase in productivity at high rates results in part from advances in technology due to research and development and the high managerial skills of Israeli farmers.
The overall environmental performance of Israel’s agriculture has improved significantly in the past twenty years. In particular, nutrient balances and the agriculture share in freshwater abstraction have declined substantially, partly due to better agronomic practices and changes in water management. Still, nitrogen balance remains at four times the OECD average level, calling for additional efforts.
Note: Primary factors comprise labour, land, livestock and machinery.
Source: USDA Economic Research Service Agricultural Productivity database. Available at: www.ers.usda.gov/data-products/international-agricultural-productivity/documentation-and-methods.aspx#excel.
Description of policy developments
Main policy instruments
Over the past thirty years, Israel has implemented a number of reforms related to the provision of subsidies, central planning of agricultural industries, and the allocation of production quotas, price controls and import protection. The government continues to be involved in the allocation of key factors of production such as land, water and foreign workers. Land and water resources are almost entirely state-owned. Land is allocated to farmers for a low, nominal fee and is not tradeable. Water is allocated to farmers through a quota system. The government also applies a yearly quota of foreign workers with permits to work in agriculture. Both the overall quota and the allocation of workers to individual farmers are strictly regulated.
Some commodities continue to benefit from guaranteed prices and production quotas. Guaranteed prices for milk are based on the average cost of production and while they are updated regularly, they diverge considerably from the level and evolution of prices on international markets. Minimum prices are also guaranteed for wheat, based on the Kansas market price, adjusted for quality and transportation costs. Egg production quotas and administrated prices, which serve as the basis for the inspected retail prices, together with border protection, are applied as an instrument to provide price support to producers. On the other hand, consumer price controls are applied for a range of basic food products, including bread, milk and dairy products, eggs and salt.
Egg and poultry producers in “peripheral areas” at the northern border receive direct payments, based on output levels for egg, and encompassing a mixture of payments decoupled from production and output payments for poultry producers (OECD, 2010).
Support to investments is provided by capital grants. Farmers who participate in the investment support scheme are also entitled to income tax exemptions and accelerated depreciation. Since 2009, an investment support programme has been implemented to partly replace foreign workers in the agricultural sector, but budgetary allocations for this programme declined strongly in recent years.
Insurance schemes provided by the Insurance Fund for Natural Risks in Agriculture (Kanat) are subsidised. The government intends to increase premium subsidy rates and to extend the coverage through the inclusion of new crops. The support part in the total assurance premium is at 80% in the case of the multi-risk insurance schemes and at 35% in the case of the insurance schemes against natural hazards. Since 2010, revenue insurance has been applied for rain-fed crops to protect against a loss of revenue caused by price decrease, low yields or a combination of both. In 2015, a credit fund was launched with 85% state guarantee.
Following the implementation of the Uruguay Round Agreement on Agriculture (URAA), Israel now maintains a more transparent and open trade regime. However, high border tariff protection on agri-food products, although much below bound rates, remains a key tool in supporting agricultural producers. Under the URAA, Israel established tariff rate quotas (TRQs) for wheat, fats and oils, walnuts, prunes, maize, orange juice and other citrus juices, beef and sheep meat and various dairy products. All of Israel’s preferential trade agreements (apart from that with the European Free Trade Association, EFTA) also include tariff-quota commitments for agricultural products. In total, Israel implements more than 100 Most Favoured Nation (MFN) and preferential TRQs (WTO, 2012).
Despite certain reforms that began in 2014, Israel’s tariff profile for agricultural products remains highly uneven, with very high – sometimes prohibitive – tariffs for goods such as dairy products, eggs and certain fruits and vegetables, and low, sometimes zero, tariffs for other commodities such as coarse grains, sugar, oilseed and frozen beef. The tariff system on agriculture remains complicated, involving a large number of non-ad-valorem tariffs. The simple average MFN tariff applied for agricultural products (WTO definition) was 11.9% in 2015 compared with an average for non-agricultural products of 3.3%. However, some 49% of agriculture imports entered Israel duty-free, mostly through MFN duty-free access and under preferential agreements (the most important ones are with the European Union and the United States) (WTO, 2016). With the exception of beef, poultry (including turkey), and mutton and products thereof, there is no legal requirement for imported food and agricultural products to be kosher, although imported, non-kosher agro-food products are rarely accepted by local marketing channels.
Budgetary allocations for Research and Development have regularly increased and have accounted for about 20% of the total agriculture-related budget in recent years. During 2015-2017, ILS 314 million (USD 87 million) were allocated to agriculture research and development, of which almost ILS 76 million (USD 21 million) were used for a competitive research fund. This, together with an effective transmission of innovations to the farm level through a public extension service, has allowed Israel to become a world leader in agricultural technology, particularly in farming in arid and desert conditions, and to build its comparative advantage in agriculture on knowledge and technological progress.
Israel has not developed policy measures for greenhouse gas mitigation in agriculture given that agriculture accounts for a limited and declining share of the country’s total greenhouse gas emissions (3% in 2016). Instead, the government has introduced and applied a number of programmes to support climate change adaptation. In addition to its forward-looking water resource management, the government supports programmes on climate data analysis and improving agronomic practices (see section below). It continues to support breeding efforts towards the development of crop varieties more resilient to climate change; the Israel Plant Gene Bank of the Agricultural Research Organization, which serves as a physical repository for more than 30 000 collected seeds, leads a programme to collect and conserve wild plants and landraces seeds from natural habitats all over Israel for current and future development. During the past decade, support measures have also been used to encourage soil conservation to decrease the potential for soil erosion of agricultural land and the soil’s production capacity that are projected to accelerate with climate change.
Domestic policy developments in 2017-18
Since the “Cottage Cheese” protest in 2011, Israel has been taking steps to reform some aspects of its agricultural policy with the aim to decrease consumer prices, while continuing to support its farming sector. In 2016, the Ministry of Agriculture and Rural Development (MARD) and Ministry of Finance (MoF) initiated a process to further reform agricultural support policies through the reduction of market price support and an introduction of direct payments to farmers, which was applied to beef production in pasture area and to the dairy sector (see trade section).
As part of the Government’s attempts to reduce regulatory burdens, in 2017, thirteen programmes were formulated and approved in areas that are under the responsibility of ten regulatory bodies, encompassing the Veterinary Services, the Planning Authority, the Dairy Board and Plant Protection Services. The government expect these programmes to result in direct savings of ILS 135 million (USD 37.5 million) per year and indirect saving of ILS 835 million (USD 232 million) per year.
On May 2016, the Joint Prices Committee of the MARD and MoF (henceforth “Committee”) discussed a proposal put forward by MARD to impose price control on the margins of fruit and vegetables to respond to the concern that large wholesalers and retail chains may use their market power to inflate prices. In 2017, as a first step, the Committee required the main retailers and wholesalers to supply MARD with their operational and marketing costs for the years 2015–17. As of 2017, the Committee had evaluated the profitability of the main sellers of fresh produce in 2015, finding a large variation in profitability but no indication of excessive profitability. Based on the analysis of 2016 data, the Committee may consider whether to require any intervention, such as imposing a price control or introducing other binding rules.
Several efforts have been undertaken to encourage greater competition in marketing of and consumer access to local and fresh horticulture produce. First, MARD allocated ILS 20 million (USD 5.5 million) for 2017-19 to support local authorities to enable and facilitate direct sales of agricultural produce (farmers’ markets) within their municipal boundaries. The programme also aims to encourage consumption of locally produced fruits and vegetables, and to strengthen and assist individual, independent farmers to co-operate under this umbrella, thereby increasing their income. Second, the government is conducting a regulatory impact analysis of unfair trading practices to improve commercial relations between farmers and sellers of fresh fruit and vegetables. Responses to a government-led 2017 consultation of farmers and farmers’ representatives suggest that legislation may be needed to establish rules for fair trade. Third, to enhance price transparency in the food chain, the government launched a smartphone application providing daily fruit and vegetable wholesale prices to users (USDA/FAS, 2017).
The government has renewed its interest to improve the animal welfare, sanitary, environmental and economic performance of the egg production sector. Following 2007 and 2010 decisions that were not applied, and recommendations of a professional committee in 2015, the government in 2017 decided to once again take steps to improve this sector whilst implementing changes with greater flexibility, including via poultry houses relocation. A budget of ILS 340 million (USD 94.5 million) has been allocated towards funding renovation of infrastructure and poultry houses with a planned reduction of the price of eggs by ILS 0.05 (USD 0.01) to also occur as a result of expected improvements in production efficiency from upgraded assets and economies of scale. The reform programme, still under discussion, would last from 2018 to 2022.
Price reducing measures were not applied consistently for all commodities in 2017. After four years of continued decline, the guaranteed prices of selected commodities increased in 2017, by an average of 6% for raw milk; 0.3% for eggs; and 1.7% for wheat. Changes in milk target prices depend on changes in cost of production and have resulted in the national producer price for milk being significantly higher than international prices. Milk accounts for 17% of the total market price support measured for the Israeli agriculture in 2017 and hence contributes significantly to relatively high level of Israel’ farm support.
Confronted with a five year drought that may continue, the Water Authority imposed further restrictions in water allocation, particularly in the North, thereby reducing water supplied to agriculture. In 2016, due to a lack of precipitation, the Upper Galilee and Golan Heights regions were disconnected from the national water system. In 2017, the situation worsened and in order to prevent damage to the Sea of Galilee’s water quality, the “Kinneret surrounding” was also disconnected. Withdrawals from users on any water course leading to the Sea of Galilee were restricted. The “Kinneret surrounding” area’s water allocation was cut by 8%; that of Upper Galilee and Golan Heights was cut by 25% in comparison with the previous year’s allocation. Further water cuts will be implemented in 2018, for the third year in the North, equivalent to a cut of 36% compared to 2015 allocations and of 19% in the Sea of Galilee region. A yet-to-be-determined water allocation cut will also be applied in the national water system fed by seawater desalination due to a sharp decline in stored groundwater. Farmers have already been advised to prepare for the expected water cut.
In parallel, the government clarified the implementation of its reform of the agricultural water pricing system. In 2017, in an effort towards equity, the government approved the amendment of the Water Law (called “the amendment to article 27”) introducing flat water rates and removing the extraction levy for fresh water supplied to agriculture, and the Water Authority published rules for its implementation. These rules specify the expected tariffs and the accepted method for calculating the “normative costs”—reflecting the real cost of pumping and distributing the water—for producers using independent water sources. These producers will have to pay a water fee corresponding to the difference between these calculated normative costs and a gradually reduced water tariff of ILS 1.81 per cubic meter to the national water company Mekorot by June 2019.1 Producers located in areas lacking alternative water sources—defined as the Upper Galilee, Golan, Jordan Rift Valley, Judea and Samaria, and the Jordan Valley—will pay ILS 1.54 (USD 0.43) per cubic meter to Mekorot in June 2019.
In 2017, the Investment Administration of MARD continued its effort to support and encourage the agricultural sector to treat agricultural waste, in order to mitigate the impacts of such waste on environment and human health. The programme supports the transformation of agriculture’s by-products into usable recycled products or raw material to be used for renewable energy production and it provides support for the reduction of waste transportation to landfills. It covers fixed capital formation and offers payments for co-operatives that want to build new waste treatment compounds on their common land. More specific efforts by the Investment Administration include the establishment of animal and plant waste treatment facilities (carcasses and excrement of poultry, fish, sheep and pigs) under a three-year, ILS 20 million (USD 5.6 million), plan, which ended in 2017 but will be renewed in 2018; a project on the treatment of tree branches (pruning) in order to prevent the damage resulting from charcoal production which is a severe environmental hazard, amounting to ILS 6 million (USD 1.7 million) over a three-year period beginning in 2017; and the construction of facilities for the treatment of effluents from dairy cow milking parlours, amounting to ILS 18 million (USD 5 million) over a three-year period beginning in 2017.
To support the sustainable use of natural resources and to respond to changing climate conditions, the Investment Administration launched a multi-year (2018-2020) ILS 45 million (USD 12.5 million) programme to support the adoption of new technologies in the field of precision agriculture, such as satellite-based information services, interpreted drone images or sensors which transmit data used for irrigation control, fertilization, spraying and growth. The programme provides grants for new technology and for the development of new information services.
A new budget of ILS 1.5 million (USD 0.4 million) has also been allocated for regional agri-environmental projects that promote agricultural practices decreasing the negative impact of intensive agriculture on natural resources or encouraging positive externalities, and promoting the adaptation to climate change. The budget will be allocated to four regional councils during five years (2017-2021). Selected projects shall be led by the regional council representatives in co-operation with farmers, extension services, residents, ecologists, economists, and experts from MARD and the Nature and Parks Authority.
In co-operation with the Israeli Meteorological Services, MARD is in the process of collecting and quantifying the relevant climatic data for agriculture in Israel, with the objective to provide tools for future risk assessment. The programme, to be completed in mid-2019, includes past climate assessment and 2030-2050 forecasts of more than 50 critical climatic indicators for the different production sectors in agriculture in 11 different agro-climatic zones in Israel.
In 2017, MARD’s Land Conservation and Drainage Division has assigned approximately ILS 10 million (USD 2.8 million) to its soil conservation programme to minimise runoff and erosion processes. For 2018, the provisional budget is set to increase by 20% in order to continue promoting the conservation of agricultural land and better management of water and land for flood control.
Trade policy developments in 2017-18
The September 2016 reform agreement on the beef sector continued to be applied. The agreement foresees partial conversion of farm support programmes for beef producers from indirect support, by means of tariff rate quotas and tariffs, to a system of direct payments. The quotas for duty free fresh beef imports is increasing gradually to reach 17 500 tonnes in 2020 and the MFN customs rates for out-of-quota beef imports are set to decrease gradually to 12% and zero ILS per tonne in 2020. This partial opening of the beef market is accompanied by compensation for cattle farmers, paid on top of the existing seven-year support programme agreed in 2014. This additional support amounting to ILS 12 million (USD 3.3 million) in 2017 will reach ILS 16 million (USD 4.4 million) in 2021 and then remain at this level until 2024. Payments are to be made per unit of pasture area.
During 2017, under the 2013 “Locker Deal”, which encouraged the opening of the dairy market and supported the exit of small dairy producers, duty free quota of cheese was increased from 5 400 to 6 000 tonnes. Imports of yellow hard cheese in retail packaging led to the introduction of new types of yellow cheese in stores, that are 20% to 40% cheaper, compared to the domestically produced hard cheese.
Several free trade agreements (FTA) are currently being discussed. The FTA with EFTA is under revision. A revised FTA with Canada and a new FTA with Panama are under legal review. A new FTA with Colombia has been ratified by Israel but not yet by Colombia. New FTAs with several other countries, including Ukraine, South Korea, People’s Republic of China, Viet Nam and the EACU, are at varying stages of progress.
References
OECD (2018a), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en
OECD (2018b), OECD Economic Surveys: Israel 2018, OECD Publishing, Paris. http://dx.doi.org/10.1787/eco_surveys-isr-2018-en
OECD (2010), OECD Review of Agricultural Policies: Israel 2010, OECD Review of Agricultural Policies, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264079397-en
US Department of Agriculture Foreign Agriculture Services (USDA-FAS) (2017), “Israel: Tel Aviv Tidbits, May 2017”, Global Agriculture Information Network (GAIN), USDA, Washington DC.
WTO (2016), World Tariff Profiles 2016, published by WTO, ITC, UNCTAD, Geneva, https://www.wto.org/english/res_e/booksp_e/tariff_profiles16_e.pdf.
WTO (2012), Trade Policy Review, Report by the Secretariat: Israel, WTO, Geneva, 25 September.
Note
← 1. In June 2017, the price for Mekorot water users in these areas fell from ILS 2.5 (USD 0.7) per cubic meter to ILS 1.98 (USD 0.55) per cubic meter and in June 2019 it will be reduced to ILS 1.81 (USD 0.5) per cubic meter.