Hedging in the second-generation biofuels market: Insights from UCOME

The significance of used cooking oil methyl ester (UCOME) is underscored by the European Union's Renewable Energy Directive III, which advocates for the utilization of renewable energy sources. The demand for UCOME extends beyond Europe, as evidenced by the California Low Carbon Fuel Standard in the United States, which have contributed to the global expansion of UCOME consumption. Notwithstanding its growing relevance, UCOME prices exhibit high volatility, influenced by factors such as geopolitical events, supply chain disruptions caused by the global pandemic, and fluctuations in the availability of used cooking oil, its primary feedstock. The absence of specific futures contracts for UCOME complicates risk mitigation, posing challenges for effective price management and market stability. To address this issue, the study employs econometric models to evaluate the effectiveness of cross-hedging UCOME prices with diesel and crude futures, offering insights into potential strategies for reducing price exposure in the biofuel sector.