Ethanol is getting very close to hitting the blend wall, according to economists with the U.S. Department of Agriculture.

With four months in a row of record ethanol production and stagnant gasoline demand, ethanol stocks are increasing. “Margins have weakened a lot over the last few weeks,” says USDA chief economist Joe Glauber, and indicators are that the blend wall is closing in.

“We’ve seen a sharp drop in ethanol prices,” USDA Outlook Board Gerry Bange adds in a USDA radio report, which he says has cut returns for ethanol producers dramatically.

That means that the future for the industry may very well hinge on the decision EPA has yet to make – moving the allowable blend level for ethanol in gasoline up to 15 percent from the current 10. “Given the fact that gasoline consumption in this country simply is not growing very rapidly and has essentially been flat for some time now, we are getting to the point where we simply have absorbed as much ethanol as we can under the current E10 legislation,” said Bange.

USDA’s latest supply-demand report out Friday left projected 2009-10 corn use for ethanol unchanged at 4.3 million bushels but lowered corn feed and residual use by 100 million bushels lower as March 1 stocks and a record January ethanol production indicate lower-than-expected December-February feed and residual disappearance.