NEW YORK -- U.S. ethanol capacity is expected to reach about 12 billion gallons next year, while current demand is just less than seven billion gallons, the Wall Street Journal reports.

Additionally, the price of ethanol has fallen by 30 percent over the past few months, while the price of corn has increased. The price drop is squeezing ethanol companies’ profits and pushing some ethanol plants to the brink of bankruptcy.

Some ethanol companies are “under deathwatch” now, said Chris Groobey, partner at Baker & McKenzie.

Government mandates and calls from President Bush that ethanol could help wean Americans off foreign sources of fuel, made output of the corn-based fuel hit highs in the past year. U.S. ethanol production rose to 4.8 billion gallons last year, up from 1.7 billion gallons in 2001, according to the Renewable Fuels Association. The number of ethanol plants increased to 119, up from 56 in 2001. And there are 86 more plants under construction.

But the price of ethanol has dropped to about $1.50 a gallon, down from about $2.50 at the end of last year, according to the Oil Price Information Service. That is largely because too much ethanol is being produced. Part of the problem appears to be that oil companies aren’t able to blend ethanol into gasoline as quickly as ethanol is produced.

Financing for new ethanol plants is drying up in many areas, and plans to build are being delayed or canceled across the Midwest, as investors increasingly decide that only the most-efficient ethanol plants are worth their money.

“It’s probably going to get worse before it gets better,” said Brian Bolster, a vice president in the investment-banking division at Goldman Sachs Group Inc.

Additionally, ethanol producers say the price to build new plants is rising. A new ethanol plant costs about $2.20 per gallon of annual capacity, said Mr. Bernstein, up from $1.50 a year ago.

“What we saw in the last few years was a number of other lenders or potential investors who maybe got a little bit more enthused than we thought was warranted,” says Jack Cassidy, a vice president at rural lender CoBank.