With the price of corn continuing to grow, Gulf Ethanol plans to modify unprofitable corn-based ethanol plants to use cellulosic materials instead.

"Ethanol stocks have been a bust in recent months as rising corn costs have squeezed the profit margin of traditional ethanol plants," according to the announcement, released Monday.

Houston-based Gulf Ethanol expects to be able to buy cellulose for about 45 cents per gallon, compared with current producers’ feedstock costs of nearly $2 per gallon, a model that "revolutionizes the economics of ethanol," according to a written statement by President J.T. Cloud.

It’s unclear which plants Gulf Ethanol -- an ethanol distributor and marketing company -- plans to convert. As of January the company hadn’t yet produced any ethanol, although it planned to construct "one or more ethanol production facilities or blending plants or combinations," according to a Pink Sheet filing (also see Gulf Ethanol’s third-quarter report, filed in November). Earlier this month the company said it planned to meet with several Central American ethanol producers to negotiate conversions in which Gulf will provide the cellulosic technology and retrofits in exchange for a share of the plants’ profits.

The company also didn’t say what type of cellulosic material it plans to use, what type of technology it will use to convert the material into ethanol or  how many plants it plans to retrofit.

Still the title of the announcement, "Gulf Announces Contrarian Ethanol Play," was appropriate.

After all, while many advocates hope that cellulosic ethanol -- which is made out of nonfood materials such as switchgrass, wood chips and corn cobs -- could one day reduce costs and expand the amount of ethanol the industry can make without competing with food crops, the technologies haven’t yet reached their potential.

So far, cellulosic ethanol remains more costly to produce and manufacturing plants haven’t reached mass production. Harvesting and collecting enough cellulosic material to continuously run a large plant is another challenge.

So switching corn-based plants into cellulosic plants to save money seems like a stretch.

"Cellulosic ethanol is still not necessarily commercially viable at this point," said Rick Kment, a biofuels analyst with DTN Research.

But retooling an existing plant would be cheaper than building a new cellulosic ethanol plant from scratch, with the company being able to take advantage of the depreciation benefits, as well as the fact that permits already are approved and that part of the plant already is paid for, he said.

 Kment said he expects Gulf will probably continue to run the plant using corn while the changes are being made -- resulting in little to no downtime.

"What they’re doing, in my opinion, is [claiming] their stake in the cellulosic industry, saying ’we’re going to be a big player utilizing what we’ve already done in the industry,’ he said. "I foresee this to be the mode of action of several of these companies -- taking a handful of their corn-based ethanol plants and moving them to cellulosic, either in a combo plant or utilizing plants that are older and need some reconstruction or reinvestment."

Still, such a move is rife with risks.

For one thing, nobody knows what the real cost of cellulosic feedstocks will be once the demand increases, Kment said. 

With the United States targeting 36 billion gallons of ethanol by 2022, and 21 billion of those gallons coming from nonfood crops, many cellulosic ethanol manufacturers are likely to step up production -- and that will mean higher prices for cellulose, he said.

Take the story of corn prices as a case in point.

Many of today’s ethanol plants were built when corn hovered at $2 a bushel, projecting investment returns based on that price, Kment said. Now corn is selling for $5.64 per bushel, according to Gulf Ethanol, and that has changed the economics considerably, causing some companies to postpone or cancel plants (see Ethanol Margins Suffer, Ethanol’s Tough Times Continue, Biofuels Get Funding as an Ethanol Plant Gets Canceled, E3 Plant Craps Out, Another Ethanol Plant Gets Canceled and Biofuel Forecast Buoys a Bit).

"The feedstock cost is going to be significantly more than what the current value of it is," he said.
 
Will companies, like Gulf, run from rising corn prices only to encounter the same problem with cellulosic materials?

The cost of wood chips, for instance, already is rising at 2 to 3 percent per year, according to research firm Forest2Market, which forecasts the growth would accelerate to 5 to 7 percent annually if cellulosic ethanol takes off.

"That’s one of the things cellulosic ethanol is really going to struggle with in the next two to four years -- figuring out what the cost of these feedstocks is going to be once people start demanding [cellulosic ethanol]," Kment said. "Nobody knows what the overall dynamics are going to be at this point and what the real costs will be, but it is going to be completely different than they are now."

CORRECTION: This story was modified to clarify that Gulf Ethanol doesn’t yet produce ethanol.