USDA further increased its estimates of ethanol demand for 2011/12 to 5.150 billion bushels or 38.1 per cent of total use, making ethanol the primary channel for the US corn crop.

Much of the growth in US ethanol demand has been the result of government mandates for blending renewable fuels with gasoline. Under the mandate of the Clean Air Act, the EPA indicated that for 2011, a minimum of 13.95 billion gallons of renewable fuels (ethanol) will need to be consumed in the US (see here for more).

This translates roughly into five billion bushels of corn (using a 2.79 conversion factor; some plants are more efficient).

With all the talk of removing refiner tax credits and import taxes, the matter of fact is that the ethanol mandate will not go away and it will likely continue to increase into 2012 and beyond.

Indeed, the main issue that the ethanol industry faces at the moment is that it is very close to hitting blending limits, hence the effort to increase blending limits to 15 per cent and moving some of these tax credits towards developing the infrastructure that will support E15 blends.

Another factor that has supported the growth of ethanol demand in recent years has been the expanding export market for US ethanol.

Higher fuel prices, a weak US dollar and mandates for renewable fuels in other countries have supported this growth.

For the period September 2010 to May 2011, US ethanol exports reached 578.5 million gallons or the equivalent of 206 million bushels of corn.

Given the current export pace, we could expect another 190-200 million gallons to be exported in June, July and August, for a total of 275 million bushels of corn.

The second chart below shows the main markets for US ethanol so far in this marketing year.

Probably the most surprising insight is that Brazil accounted for about 21 per cent of all US ethanol exports this year.

Much of the Brazilian purchases took place in March, April and May, as the cane crop crush was getting underway and domestic supplies became very tight.

Going forward, high sugar prices, a strong currency and very strong domestic demand in Brazil will limit their ability to export to world markets. This will make the US the favoured supplier of ethanol in world markets and further pressure very tight US corn stocks.