What a Double-Dip Recession Could Do To the Biofuel Industry

Biofuel stocks are hurting. In fact, due to the very bleak economic outlook in the United States for the 2nd half of 2010, those prices could be headed much lower and this economic downturn is only serving to increase investor hesitancy toward investing capital into the biofuel industry.

Possibility of Double-Dip

The U.S. recovery was moving along quite nicely in early 2010, but the weight of the EuroZone Debt Crisis and domestic problems in the United States led to very disappointing U.S. economic data in June and July. Consumer demand dropped, employment began to fall as the U.S. Census season ended, retail sales figures disappointed, and several other key data combined to clearly communicate that the U.S. recovery was hitting a major wall of resistance.

In late July, Fed Chairman Ben Bernanke testified before Congress and stated that his economic outlook for the U.S. economy and economic recovery is “unusually uncertain.” If the leading economic minds of our times are unsure of the economic outlook, it means we are most likely in for a bit of pain during Q3 and Q4. This very bleak outlook from the Federal Reserve has begun to weigh on equity markets, and on August 11th, the Dow tumbled over 200 points. There is just no bright spot in the economy right now.

The term “double-dip recession” has begun surfacing in news commentaries and editorials throughout the United States. The housing sector is showing strong signs of possible contraction, and if it does begin to contract significantly, that could push an already fragile U.S. recovery back into recession. The Federal Reserve has made it clear they will do all in their power to prevent this from happening, no matter how much money that have to print.

This economic downturn could not have come at a worse time for the biofuel industry. Currently, the Renewable Fuels Standard is mandating a consistent increase in the amount of next generation ethanol that is produced in the U.S. By 2016, the RFS estimates that 16 billion gallons of it will be produced yearly. This goal is huge and in order for it to be reached, there must be a massive amount of expansion and growth in the industry; however, there is a correspondingly huge shortage of cash available in the industry right now. It is estimated that $500 million will be needed for each facility that will be built, and capital has been extremely hard to come by as many investors are still on the sidelines. Even the forex has not reached the daily volume of pre-Crisis levels.

The Effects of a Double-Dip

Due to a myriad of reasons, investors have been somewhat turned off to the idea of putting up large amounts of capital. This problem will only be exacerbated by a severe economic slow-down, or, even worse, a contraction. If capital is difficult to raise during the decent economic growth of early 2010, it will be nearly impossible during a slow-down. Venture capitalists, of course, do not like to take risk during times of economic uncertainty. All of the cash that investors have sitting on the sidelines may stay there for the foreseeable future.

Projecting further into the future with our economic analysis, if the United States does enter into another recession, it will be nothing less than devastating for the economy over the next decade, and it will increase deflationary fears, which will scare off investors even more. Another recession at this point in our fragile recovery would set the U.S. economy back years and would most likely result in an extended period of very slow economic growth for 5-10 years. This sort of economic climate will make it almost impossible for raising capital, and it could serve to deal a deafening blow to the industry.