UPDATE 1 ANALYSIS-Flooded ethanol industry threatens US mandates

(Updates EPA, corn prices, status of ADM, POET plants, paragraphs 9-18)

By Timothy Gardner

NEW YORK, June 13 (Reuters) - Floods in the Midwest that have pushed corn prices to record levels have wiped out profits for making U.S. ethanol and threaten to sink production of the fuel below government mandates.

"If it's simply economically impossible to make ethanol. then (the government) may have to amend or suspend the Renewable Fuel Standard," analyst Pavel Molchanov at Raymond James and Associates in Houston said by telephone.

The floods ravaging the corn crop across at least eight states, including Iowa and Illinois, at a time of growing global demand have put another roadblock before the U.S. biofuels policy. Hoping to wean the country off foreign oil, the Bush administration has boosted incentives and mandates for alternative fuels made from food crops. Many have blamed those steps for lifting food prices at a time of mounting hunger problems.

Corn prices for the new-crop July 2009 corn hit a record near $8 per bushel on Friday, while old-crop also hit a record above $7.

Molchanov estimated that average U.S. producers now lose 8 cents for every gallon of ethanol distilled, compared with a profit margin of 20 cents a gallon two weeks ago. Besides higher corn prices, margins also have been squeezed by two-year highs for natural gas, which fires most ethanol plants.

As much as 2 billion to 5 billion gallons of ethanol "could go offline in the next few months due to high corn prices," a Citi Investment Research note said. U.S. ethanol production capacity is about 8.8 billion gallons per year from 154 distilleries.

"If the ethanol is not there, I don't think the government expects blenders to blend as much," said Ron Oster, an analyst at BroadPoint Capital in St. Louis.