U.S. ethanol production has increased rapidly since 2006, reaching about 13.95 billion gallons in 2011 (Table 1). The increase was driven by a combination of high crude oil prices, federal Renewable Fuel Standards (RFS) for domestic renewable fuel consumption, a generous tax credit for ethanol blenders, and large net exports in 2010 and 2011. The expansion in domestic ethanol production has been one of the main drivers of the corn market since 2006, as corn is the primary feedstock for ethanol production in the U.S. The USDA estimates that corn processed for ethanol production totaled 5.021 billion bushels in the 2010-11 marketing year and projects use at 5 billion bushels for the current marketing year. Accounting for co-product production, net corn consumption for ethanol production in 2011-12 will be near 3.35 billion bushels, or about 26 percent of total expected consumption.

The rise in ethanol production has recently run up against what is known as the "blend wall." Domestic ethanol consumption is almost entirely in the form of low level blends with gasoline capped at 10 percent, although small amounts have been consumed as an 85 percent blend. The approach of the 10 percent blend wall is apparent in the inclusion rates presented in the next to the last line of Table 1. The inclusion rate is calculated by converting estimates of total BTUs of motor gasoline consumption provided by the U.S. Energy Information Agency (EIA) into an estimate of gallons of motor gasoline consumption. The rate is then calculated as the ratio of domestic ethanol consumption to total motor gasoline consumption. The calculated inclusion rate increased from 8 percent in 2009 to 9.5 percent in 2011. The jump in the inclusion rate was driven by the increase in ethanol consumption and the overall decline in motor gasoline consumption.

The ethanol inclusion rate for 2012 is expected to be even higher as domestic ethanol production remains large, exports decline, and motor gasoline consumption stagnates. Projections from EIA indicate an increase of only 0.2 percent in motor gasoline consumption in 2012. It appears that the ethanol inclusion rate could increase to about 9.8 percent in 2012, although the year is not yet half over so considerable uncertainty remains. While one can quibble with the details of projecting the ethanol inclusion rate, there is little doubt that we are very close to the 10 percent blending wall in 2012.

The blend wall has important implications for ethanol production and consumption after 2012. In particular, the maximum levels of ethanol blending under current 10 percent blend restrictions may soon be less than the RFS blending requirements. The requirements for renewable biofuel blending was at 12.6 billion gallons in 2011; is at 13.2 billion gallons this year; and increases to 13.8 billion in 2013, 14.4 billion in 2014 and 15 billion in 2015. It seems highly likely that the blend wall will be binding in 2013 and this will constrain domestic ethanol consumption to be less than the RFS mandate of 13.8 billion gallons. Some uncertainty is introduced because the blend wall (in gallons) can change with total motor gasoline consumption and blenders have the ability to meet some of the blending requirements from credits generated from recent blending in excess of the requirements.