Corn Ethanol Boom Fading, But Get Ready For Round Two

Wow, the bloom sure has started to come off the corn-based ethanol rose. We’ve been detailing the backlash against biofuels recently, and over the past few days, prominent articles in the mainstream media – The Wall Street Journal, The New York Times, and The Economist – have all declared the corn-based ethanol boom to be sputtering, in part because a surplus has pushed the average national ethanol price down 30 percent since May.

The WSJ says the price drop, combined with the rising cost of corn, is pushing some ethanol plants to the brink of bankruptcy. Meanwhile, financing for new ethanol plants is drying up and plans to build new plants are being shelved. Some ethanol companies are “under deathwatch,” the WSJ quotes Chris Groobey, partner with a law firm that has worked with lenders and private-equity funds involved with ethanol, as saying. Part of the price fall comes from the fact that oil companies aren’t blending it with gasoline as quickly as the fuel is being produced.

The ethanol industry is also facing a glut, because while the government has supported production, there’s been a lack of transportation infrastructure and flex fuel vehicles. Since standard ethanol is corrosive, it can’t be shipped in the traditional fuel network, and vehicles need to be altered to use the biofuel as well.

The NYT’s quotes an economics professor from Iowa State University:

“This is a dangerous time for people who are making investments” – Neil E. Harl, economics professor, Iowa State University, via NYT.

Not fully articulated in the NYT or the WSJ articles is the fact that most investors see corn-based ethanol as a stepping stone for the next phase of cellulosic non-food crop-based biofuel, which startups are struggling to bring to market. The government, venture capitalists, and universities (as well as Wired, as per its cover story last week) are all betting that cellulosic ethanol will be the key to ethanol and biofuels infiltrating U.S. transportation in a fundamental way.

The Economist, on the other hand, does a good job of outlining four firms that are working on some next-gen biofuel technology whose properties are similar to those of standard gasoline. Codexis, from Redwood City, Calif., is developing “biopetrol” made through a process they call “molecular evolution,” where numerous enzymes are developed and selected in a process not unlike natural selection. Amyris Biotechnology, of Emeryville, Calif., is turning to synthetic biology to use living organisms to make a gas substitute. We’ve covered the Khosla-backed LS9, and Synthetic Genomics, the Rockville, Md.-based startup led by Craig Venter, is probably the most high-profile startup to come out of this area.

While all these doomsday predictions in the media are of little comfort to investors in corn-based ethanol, we still have some faith. New technology being developed in the labs of startups promises to offer efficient, market-supported, non-corn based alternatives. If that can happen in a relatively short time frame (the next few years), we may very well have another ethanol boom on our hands.

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