30 Jul 2017 Why are Cyprus milk prices so high?

Last month, the EU’s statistical service, Eurostat, published comparisons of various consumer prices across the EU.

The results are based on surveys of more than 2,400 consumer goods and services. Price differences are calculated on a ‘purchasing power parity’ (PPP) basis.

This means that Eurostat officials do not just compare the sales price of a litre of milk, they compare its price relative to spending power in that country.

Overall, Cyprus came out lower than the EU average for the all-inclusive category of ‘household final consumption expenditure’: that is, for all household spending.

Eurostat found that overall prices at PPP in Cyprus were 88% of the EU28 average in 2006.

By comparison, they were 86% in Greece and 121% in the UK. Denmark came out top among EU members, at 139%, while Bulgaria (despite a fixed exchange rate to the euro) was bottom, at 48%.

Where Cyprus sticks out, however, is in prices of milk, cheese and eggs. Here, prices at PPP in Cyprus were the highest in the EU, at 145% of the EU28 average. Greece was 134% and the UK was 104%.

Why is this the case?

One reason in Cyprus’ case is the weather. There is not much rain, which means there is not much grass, so farmers spend more feeding cows with imported grain.

A bigger reason, however, is likely to be that Cyprus is an island. Dairy prices in Greece, which is dotted with islands, were the second highest in the EU at 139%.

Ireland had the third highest dairy prices in the EU, at 130% of the EU average, while prices in Malta were a fairly high 118%.

It is easier for competitors to supply fresh milk to another country across land than across the sea.

When there are no external suppliers, this means there is less price competition. This, in turn, leads to higher prices for consumers.

In Cyprus, where there are essentially only two milk producers, this impact is even more extreme and leads to a market situation that behaves like a cartel.

Indeed, the Commission for the Protection of Competition slapped a €2.1-million fine on the Cattle Farmers’ Association (which has 65% of the market) for price-fixing in December 2014.

In a small market, only strong regulatory oversight can ensure that the consumer is not taken for a ride.

Restaurants do better

To give an idea of how plenty of competition in a sector can convert into lower prices, let’s take a look at a sector where Cyprus does have a large amount of market players, namely in tourism.

According to data from the Cyprus Statistical Service, there are around 5,000 tourism establishments in Cyprus (both hotels and food-service outlets). This means, of course, that customers have more options, so restaurants and hotels need to compete on price (as well as other factors) to attract customers.

As you would expect, in this kind of market, prices compare much more favourably in Cyprus with the EU average than in the dairy sector.

Eurostat found that restaurant and hotel prices in Cyprus were just 91% of the EU average in 2016.

By Fiona Mullen, Director, Sapienta Economics Ltd