Surging food prices will affect household budgets worldwide and hurt consumer spending, said David R. Kotok, chairman and chief investment officer of Cumberland Advisors Inc.
Sarasota, Florida-based Cumberland, an investment advisory firm, is holding cash in its U.S. exchange-traded funds accounts and has reduced investments related to consumer discretionary spending in response to the developing food-price spike, Kotok wrote in a letter to clients dated Aug. 11.
“Take this food price shock seriously,” Kotok wrote. “This decline in food production is likely to be a multi-year cycle. The impact of food price increases is now global. Moreover, we have run down the inventory cushions.”
The United Nations’ Food & Agriculture Organization index of 55 food items jumped 6.2 percent in July, the most since 2009, as drought reduces grain production in the U.S. and Russia, the FAO reported Aug. 9.
Food and energy costs will negatively impact household spend in mature economies and “severely” restrict household budgets in emerging and developing countries, where food is a large component of consumer-price indexes, according to Kotok.
“The shock is the weather, and nobody can control the weather,” Kotok said. “Central bank monetary policy can do nothing about an outside shock. Central banks cannot grow corn.”
The impact on budgets will cause “consumer retrenchment” in other areas of spending, according to Kotok.
“This developing food price spike piles on top of the energy shock that is also underway,” Kotok wrote. “The geopolitical risk premium increases as food prices consume increasing amounts of household budgets.”
Some models indicate corn could exceed $10 a bushel in a spike, Kotok wrote, without providing details.