U.S. ethanol producers are reducing output, or closing their doors, in response to the drought-induced reduction in corn supplies, according to Darrel Good, Extension agricultural economist at the University of Illinois. Good says it is a trend that is likely to continue through the rest of the year.

"For the two weeks ended Oct. 19, production was down 12 percent from that of last year,” Good said. “The year-over-year reductions are likely to continue to be large, at least through the end of the calendar year.”

Valero Energy Corp., the third-biggest U.S. ethanol producer, has idled its distilleries in Albion, Neb., and Linden, Ind., until production is profitable again, according to Doane Agricultural Services. Both plants have a production capacity of 120 million gallons per year.

Valero joins Bunge-Ergon Vicksburg LLC, which will shutter its Mississippi ethanol distillery by Nov. 30, according to Doane. Abengoa SA shut its Madison, Ill., plant recently and Biofuel Energy Corp. closed its Fairmont, Minn., facility last month.

Widespread drought conditions in the U.S. Corn Belt this summer reduced the U.S. corn crop to an expected 10.7 billion bushels, according to USDA’s Oct. 11 crop report. The short corn crop has resulted in record-level corn prices as well as the lowest level of inventory stocks in eight years.

The resulting high grain prices prompted the governors of seven states, 25 senators, 156 House members plus many livestock and poultry producer organizations to petition the U.S. Environmental Protection Agency (EPA) to waive the Renewable Fuels Standard (RFS) that mandates specific levels of ethanol to be blended into gasoline. The federal RFS requires 13.2 billion gallons of ethanol to be blended into gasoline in 2012 and 13.9 billion gallons in 2013. The amounts require about 4.7 billion and 4.9 billion bushels, respectively, of the nation’s corn crop.

The National Pork Producers Council (NPPC) said the mandate is causing severe economic harm to pork producers.

A decision on the waiver is expected from EPA in mid-November. According to Good, the decision by the EPA is not expected to have a substantial impact on ethanol production in the near future (see an analysis here).