Ethanol plants such as Pacific Ethanol's in Madera, Calif., face challenges.

In the past, when crude-oil prices went up, the price of most raw materials went up as well, because it simply cost more to transport them. Today, erratic weather patterns that include flooding and drought, along with population increases, a rising global middle class, a weak U.S. dollar and growing demand for biofuels have been added to the equation, driving the cost of feedstocks—and food staples—up even further with no end in sight.

Corn has been the commodity most in the spotlight due in part to large U.S. subsidies for ethanol in 2006 and 2007 that helped drive the cost of corn higher, which in turn sent prices for dairy products and meat sky high, as farmers passed the higher cost of feed grain on to consumers.

Meanwhile, analysts say the U.S. market for ethanol is saturated, and many of the large-scale refineries that planned to take advantage of federal subsidies will be cut before they even open. Public support has waned for ethanol as the food-versus-fuel debate becomes increasingly prominent in the media, and ethanol stocks, such as Pacific Ethanol (Nasdaq: PEIX), have plummeted.

Following the opening of its 40 million-gallon-per-year plant in Boardman, Ore., Pacific Ethanol announced Nov. 16, 2007 that Cascade Investment, which is owned by Microsoft (Nasdaq: MSFT) founder Bill Gates, may sell its 21 percent share of the company. The announced resignations of several key board members preceded the news. The company’s stock fell 63 percent over the course of the year, prompting the Bloomberg News Service in November 2007 to call ethanol “the worst investment of the year.”

With investor confidence and public support low, the price of ethanol hit a 28-month low by the end of 2007, resulting in the cancellation of six proposed ethanol plants, Eitan Bernstein, an analyst at Friedman Billings Ramsey & Co. in Arlington, Va. recently told Bloomberg News.

Despite the closed plants, Bernstein says several new mills are still under construction and annual U.S. output may reach 11.3 billion gallons by the end of 2008, while annual demand could decrease by about 3 billion gallons due to recently passed restrictions on the time of year ethanol can be used in Georgia and Florida.