The heterogeneous behaviour of the inflation hedging property of cocoa

In this paper, we examine distinctly the inflation hedging potential of cocoa in net cocoa-exporting and net cocoa-importing countries. The choice of cocoa is motivated by its significance as a key ingredient in the production of chocolate which is largely consumed at every household and therefore serves as a major source of revenue to cocoa investors in exporting and importing countries. Based on our preliminary analyses including panel causality tests, we formulate both panel threshold regression model and panel smooth transition regression model in order to account for any inherent nonlinearity, time-variation and structural breaks in the inflation-cocoa returns nexus. We find that cocoa offers better inflation hedging characteristics in cocoa importing countries than their cocoa exporting counterparts. While the results are robust to alternative frequency and market size, we are able to establish that ignoring the presence of threshold effects may lead to wrong conclusions.