Through April, the ethanol industry produced about 11.7 billion gallons per year on an annualized basis, slightly below the 12 billion gallons required by the Renewable Fuel Standard for 2010. However, demand is running below production at an annualized rate of 11.5 billion gallons per year in April.

“As a result, ending stocks have been growing, and ethanol prices remain well below gasoline prices at $1.58/gallon for ethanol vs. $2.10 for wholesale gasoline,” says Ann Duignan, analyst for JP Morgan. “And, as a result, producers are making no money right now. With corn at $3.54/bushel; natural gas at $5.11/mBtu, cost per gallon is about $1.88.

However, ethanol prices have remained depressed at $1.58/gallon and even with DDGS at $104/ton, revenues are about the same, $1.88/gallon, leaving zero variable profit,” Duignan says.

Industry consensus is that the industry will need the government to allow higher blends of ethanol and gasoline to return to profitability — at least E12 if not E15.

According to the American Coalition for Ethanol (ACE), because the federal government currently limits the amount of ethanol in gasoline to just 10%, the industry will soon reach a mathematical limitation on its use of renewable fuel.

Everywhere that can use E10 soon will be using E10, and this is known as the “blend wall,” even though theoretically we are only blending 7.5% of our total gasoline consumption.

On March 6, a formal application was submitted to the U.S. Environmental Protection Agency

(EPA) to allow this base blend level to be raised to up to 15% ethanol. EPA says that it would be in a position to rule on 15% blend for vehicles newer than 2007 by the end of September and on vehicles newer than 2001 by end of October.

This is where the bureaucracy really kicks in.

After the waiver is granted — and it is expected to be granted — additional federal and state pump labeling requirements must be applied for and granted, fuel certification by state is necessary, storage rules and distribution testing have to be approved at a state and local level. Additionally, state and local fire and emergency personnel will likely have to approve underground tanks, etc.

“Given the number of requirements necessary, it is highly unlikely that any material amount of E15 will be available at retail before Spring of 2011,” Duignan says.