Wanzek Construction Inc Some plants are on hold, but others are moving ahead.

The corn-ethanol industry has sailed through storms of controversy over its net-energy balance and its value as a gasoline oxygenate to replace methyl-tertiary-butyl-ether (MTBE). But ethanol price volatility in the last year has weakened its appeal. Now, corn ethanol has run aground on the shoals of global food shortages and rising food prices, which many blame on the diversion of corn from the food chain to fuel supply. Firms may now be building the last grain-based ethanol plants in the U.S. When the market comes back, the smart money is betting cellulosic ethanol will be king.

The Renewable Fuels Association, the ethanol industry lobbying group, blames rising food prices on many factors: skyrocketing oil prices, global demand for grain and meat from booming countries like China and India, hedge-fund specula-tion on commodity markets, droughts, exports encouraged by a weak dollar and agricultural policies around the world that have limited farm productivity. But public opinion could drive the move to cellulosic ethanol, which uses plant cellulose instead of grain for ethanol production, says Rick Kment, an industry analyst for Omaha-based news service DTN.;

The Dept. of Energy is encouraging the move to cellulosic ethanol. In the last 18 months, it has spent more than $1 billion to fund seven small-scale cellulosic-ethanol plants and six commercial-scale cellulosic refineries. Companies, including General Motors, are also funding startups that are developing ethanol from cellulose and biomass. On May 2, GM said it was investing an undisclosed amount of money in Boston-based Mascoma, which will turn papermill waste, corn stalks and wood chips into cellulosic ethanol through a chemical process.

In January, GM said it was buying a stake in Warrenville, Ill.-based Coskata Inc., which says it can convert biomass into ethanol for $1 a gallon. Canada-Zeton Inc., Burlington, Ontario, is building a $25-million, 40,000-gallon-per-year demonstration plant in Canada for Coskata that will be moved near Pittsburgh when completed. But cellulosic ethanol is not expected to produce enough fuel to make a difference in the corn market for at least two years.

“One industry [corn-based ethanol] is lagging, one industry is picking up,” says Barry Carroll, referring to an increase in work on cellulosic and other, more efficient ethanol facilities. Carroll is business development manager for Lurgi Inc., Memphis, which engineers and constructs ethanol and biodiesel plants. The company is building five U.S. ethanol plants.

The Renewable Fuels Association counts 55 new ethanol plants and six expansions under way in the U.S. After ethanol reached a record high of almost $4 a gallon in May 2006, there were 300 new plants announced, says Kment. When ethanol fell to $1.50 a gallon last year, many plans flamed out, canceling or delaying hundreds of millions of gallons per year of capacity. In one instance, Sacramento, Calif.-based Pacific Ethanol Inc. turned to its contractor for financial help; Fresno-based Lyles Diversified Inc., through a subsidiary, agreed to buy $40 million of Pacific stock. Lyles designed and built Pacific Ethanol’s first plant, in Madera, Calif., and is building the company’s Stockton, Calif., facility.

Panda Hereford Ethanol L.P. Panda’s Hereford plant will be powered by cattle manure, not fossil fuels.

“It was pretty evident that all these plants would probably not make it to fruition,” Kment says. Cancellations are occurring in the planning stages, not after steel goes up on site, he says.

While ethanol has increased in price by about $1 a gallon since last fall, the market will likely continue to be shaky because of basic supply-and-demand principles. When all of the new plants come online next year, the ethanol industry will be able to produce 13.6 billion gallons of ethanol a year, enough to meet the target renewable-fuel mandate for 2012.

“The push that we had two years ago of plant construction will create a situation in the market [in which] the demand is catching up with supply,” says Bill Pentak, spokesman for Panda Ethanol, Dallas. “What we see is really a shift in the industry from a conventional Midwest model of ethanol producers” with limited use of process by-products to more efficient plants, such as Panda’s 115-million-gallon-per-year ethanol plant being built by Lurgi in Hereford, Texas, which will use cattle manure to power the plant, he says.

Panda suspended five of its six announced plants because they did not meet the new, more efficient model, Pentak says. The $186-million Hereford plant is cutting its overhead costs by using manure instead of natural gas.

Kment expects it will take two to three years for the current ethanol market to shake out. In the meantime, developers are not giving up their land or permits for new plants. Whether it is using more biomass or other technologies, including cellulosic, Panda is keeping its options open. “We’re maintaining our projects. When the window opens, we’ll be ready,” says Pentak.