UPDATE 1-U.S. ethanol output rebounds from lowest in 2 years

* Ethanol output up 13,000 bpd at 809,000 bpd last week

* First weekly production rise in 7 weeks

* Prior week's level lowest since records began 2 years ago

* Stocks of ethanol up 396,000 barrels at 19.4 mln

(Adds details, quotes, link to graphic, adds byline)

By Karl Plume

Aug 1 (Reuters) - U.S. ethanol production last week rose for
the first time in seven weeks, rebounding from the lowest level
since at least June 2010 as the price of corn, the industry's
main feedstock, slipped from an all-time high, government data
released on Wednesday showed.

Margins at some ethanol plants briefly emerged from the red
for the first time in weeks, helped also by strong prices for
distillers dried grains, an ethanol byproduct sold as a
livestock feed.

But as corn prices resumed an historic rally as the worst
U.S. drought in 55 years decimated the Midwest crop, ethanol
margins again turned negative.

"There was quite a bounce in profitability during that time
frame which turned on a little production, but that
profitability didn't last very long. The main thing that was
saving them was that DDG values are much higher than they
normally are," said Jerrod Kitt, analyst with The Linn Group.

"I think this is fairly temporary. We're getting into a time
frame where plants typically go down for maintenance, and
margins are negative across the board again after that window of
profitability was open for a day or two at most," he said.

Ethanol output rose 13,000 barrels to 809,000 barrels per
day in the week ended July 27. The previous week's 796,000 bpd
was the slowest weekly rate since the U.S. Energy Information
Administration began tracking the data just over two years ago.

Stocks of the biofuel increased by 396,000 barrels to 19.4
million barrels, above the year-ago inventory of 18.9 million
barrels, EIA data showed.

THIN CORN STOCKS, DROUGHT

Ethanol production has plunged this summer as thinning corn
stocks and a sharply reduced autumn harvest due to drought
propelled prices of the feedstock grain to record highs,
squeezing margins at many ethanol plants.

Between June 8 and July 20, the ethanol industry reduced
corn consumption by 13.5 percent and roughly 25 ethanol plants
were idle, according to the Renewable Fuels Association.

Top U.S. ethanol producer Archer Daniels Midland
this week reported an unexpected 25-percent drop in quarterly
earnings due to tight corn supplies and poor ethanol margins.

But ethanol makers, which consume more than a third of the
U.S. corn crop, weren't the only ones struggling with lofty corn
costs.

The food-versus-fuel debate heated up this week as livestock
producers petitioned the U.S. government to relax or lift the
Renewable Fuels Standard which mandates that ethanol be blended
in the country's fuel supply.

The chief executive of agribusiness giant Cargill also urged
that ethanol use requirements be addressed to ease the burden on
consumers.

The price of new-crop U.S. corn has surged more than 50
percent in just the past six weeks as the most expansive U.S.
drought since 1956 slashed yield potential at a time when stocks
of the grain were at the lowest in 15 years.

(Reporting by Karl Plume in Chicago; Editing by Dale Hudson and
Sofina Mirza-Reid)