New Kid on the Farm: Cellulosic Ethanol

Editor's note: We have updated this article to clarify that cellulosic ethanol has a higher net energy yield than corn-based ethanol. 

Last week, I saw a tiny article in The Wall Street Journal noting that VeraSun Energy (Nasdaq: VSE  ) CEO Bruce Jamerson was leaving the ethanol maker to take the helm of Mascoma, a privately held cellulosic ethanol company. He took the job because he believes cellulosic ethanol is "the next generation of ethanol manufacturing."

Personally, I am not yet familiar enough with this technology to render an opinion on that statement, but I know a trend when I see one. It's clear that investors interested in ethanol need to begin to familiarize themselves with the benefits of cellulosic ethanol.

Cellulosic ethanol is chemically identical to ethanol, but instead of using the starch from corn to produce fuel, it uses the cellulose produced from a variety of agricultural products (corn stover, switchgrass, wood residues, and other feedstocks).

Cellulosic ethanol offers many benefits. For one thing, it has a higher net energy yield than corn-based ethanol. Furthermore, because it can be produced with crops other than corn, it's not as vulnerable to the price of that commodity (which has doubled in the past few years). As an additional benefit, many of the crops used in producing cellulosic ethanol are perennial crops; they that don't need to be replanted every year, and they tend to use fewer fertilizers and pesticides than corn.

To date, the problem with cellulosic ethanol is that it is not yet easily converted into ethanol. A number of factors, however, have convinced me that this could soon change. As I reported the other day, venture capital guru Vinod Khosla recently said cellulosic ethanol will be cost-competitive with ethanol by 2009.

To bolster this point, it was announced yesterday that Mascoma was one of four companies that will split $23 million from the federal government to develop its cellulosic ethanol technology. Other winners included Cargill, Celunol, and DuPont (NYSE: DD  ) .

I should further note that this money is in addition to the $385 million the government committed last month to cellulosic ethanol research and development. The biggest winners in that round of funding included a private company called Iogen, in which both Goldman Sachs (NYSE: GS  ) and Royal Dutch Shell (NYSE: RDS  ) have invested.

The future runs on ethanol
Currently, the U.S. produces about 5 billion gallons of corn-based ethanol annually. President Bush and Congress want to push our total alternative fuel use to 35 billion gallons by 2017. From my vantage point, that figure clearly can't be reached using corn alone. Other feedstocks and technologies will be necessary.

It's still too early to determine how the market for biofuels will shake out -- biodiesel and butanol are also contenders -- but I'd encourage investors in ethanol companies such as Pacific Ethanol (Nasdaq: PEIX  ) , Archer Daniels Midland (NYSE: ADM  ) , and Aventine (NYSE: AVR  ) , to begin boning up on cellulosic ethanol. Its future will likely transform the ethanol market in the long term.

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Fool contributor Jack Uldrich lives in Minnesota, but not on a farm. He doesn't own stock in any of the companies mentioned in this article. The Fool has a strict disclosure policy.


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