Investors burned by the recent boom and bust in the U.S. ethanol industry will be wary of pouring money into plants for the next generation of biofuels without more stable returns, a J.P. Morgan analyst said on Friday.

U.S. law requires that 10.5 billion gallons (40.8 billion liters) of ethanol be blended into the gasoline supply this year to reduce dependence on foreign oil imports and lower emissions of climate-changing greenhouse gases.

But ethanol producers have struggled to find profits amid volatile corn prices and plunging gasoline demand and prices.

We have a real dilemma in the industry, Ann Duignan told the U.S. Agriculture Department's annual outlook forum.

As long as nobody's making money, the industry is not viable long term regardless of a mandate.

Four or five years ago, when corn prices were below $2 per bushel and oil prices were high, there was a gold rush feeling in the business, Duignan said, recalling a farmer she had met who had invested $200,000 in an ethanol plant.

His stocks had split nine times and his investment at that point was worth $2.3 million. Never in his life did he think he was going to be a millionaire, she said.

But backers built too much capacity and production costs soared. Many plants are idled and some made bankrupt.

I think all that is going to be remembered for a long time is the kind of boom-loss that Wall Street saw with ethanol, Duignan said.

I think from that perspective, it's going to be difficult to get investors to invest in ... cellulosic ethanol, she said.

The administration of President Barack Obama has been keen to foster the next generation biofuels like cellulosic ethanol made from crop waste, grasses and wood pulp.

The fuels are still at the pilot stage and are more expensive to produce than corn-based ethanol.

Government programs such as a permanent production tax credit for biofuel producers could help provide some stability to the industry and certainty to investors, Duignan said on the sidelines of the conference.

A production tax credit for cellulosic ethanol will expire in 2012, long before many plants are built and producing the fuel, she said.

Wall Street will also watch carefully the impending release of the Environmental Protection Agency's rules for the renewable fuels standard, she said.

The rules will provide a framework about how the United States will meet its 2007 mandate that calls for 36 billion gallons of renewable fuels to be used by 2022, including 15 billion gallons of ethanol, 16 billion gallons of cellulosic, and 5 billion gallons of other new types of biofuels.

The agency is looking carefully at the environmental impacts of the fuels, including how much they reduce greenhouse gas emissions over time, said Karl Simon, an EPA official.

The rule, which Simon said would be hundreds of pages long, will be released soon for public comment, but there was no set date, Simon said.

(Editing by Marguerita Choy)