Stock in US ethanol producer Pacific Ethanol (NASDAQ:PEIX) sold for more than $18 in November 2006. It now sells for just over $1.60. Meanwhile, investors in ethanol producer VeraSun (NYSE:VSE) lost nearly 70% this year.

But Rob Fannon says there’s a bigger ethanol bubble coming – one that can make big bucks for early investors…

This from Rob in The Growth Stock Wire:

With corn prices where they are today, corn-based ethanol is just not a viable business. But you don’t need corn to make ethanol.

Cellulosic ethanol comes from just about any part of any plant: wood, grass, sugarcane, even banana peels.

Just like corn, cellulose – what gives a plant its structure – can break down into sugars to produce ethanol. But cellulose “feedstock” is cheap and abundant. Scrap wood and discarded yard clippings are practically free, compared to $6-$8 per bushel of corn. So theoretically, a gallon of cellulosic ethanol could cost half as much to produce.

Right now, cellulosic ethanol production is confined to labs. The ramp-up to commercial scale is a few years away, which is where the investable opportunity is today… and how this story came across my radar screen.

There are two ways to invest in cellulosic ethanol… First, you could buy stock in enzyme suppliers. These are biotech and specialty chemical companies that produce the enzymes needed to break down cellulose. Or you could buy stock in integrated producers, companies building cellulosic ethanol production plants.

Rob says it’s too early to tell which the best route is. But he says, “it’s a safe bet that several winners from both sides will emerge from the race to the next energy bubble.”

The Department of Energy has already pumped $700 million into alternative fuel technologies last year. And the Energy Independence and Security Act calls for the use of 9 billion gallons of ethanol this year.

Corn-based ethanol may not have taken off, but that doesn’t mean the cheaper-to-produce cellulosic ethanol won’t.