The biofuel dominoes are starting to fall, at least as far as ethanol as a biofuel is concerned. VeraSun, which had been the second largest US-based ethanol producer, is already in liquidation. Its ethanol plants are being auctioned off or bought up by larger players with deeper pockets and staying power.  The major oil refiner Valero picked up seven of VeraSun’s plants in March. In California, industry sources are saying that previously highly touted biofuels companies Cilion and Codon Devices are heading for wind-down. Cilion is an ethanol venture that counts the well-heeled Khosla Ventures and Richard Branson’s investment group as backers. Cilion had previously announced that it was developing a 55 million gallon per year first generation ethanol plant in Kern County, and had confidently projected that it would have eight plants operating by 2008.  Codon Devices based its biofuels fortunes on its BioLOGIC protein engineering platform.

More failures are virtually certain, with oil prices hovering around the level at which ethanol is uneconomical and with investors far less wiling to part with additional cash. Consolidation will take over in the ethanol industry. Ethanol will still be produced, but only the larger or better-financed players will be able to stay in. Expect the major companies that are committed for the long-term to start buying up assets from the failing companies at attractive prices. These who got in for a quick profit will more likely wind up with pennies on the dollar.

Meanwhile, the trend toward the use of corn to produce ethanol should also start to slow. Producing fuel ethanol using crops and land that could otherwise be used to produce food has created a lot of negative political pressure.  As technology that uses cellulosic waste rather than corn as a feedstock is demonstrated, production will be shifting away from corn and toward the cellulosics. The main problem, as usual, will be economics.

Valero Energy will buy seven ethanol plants from VeraSun Energy for $477 million, the largest biofuel buyout in terms of production capacity. VeraSun, the country’s second-largest ethanol producer, filed for Chapter 11 bankruptcy protection in October. On Wednesday, a Delaware bankruptcy court approved the sale.

We can expect to see more of this as would be ethanol producers are unable to obtain funding and go Chapter 11.