* Ethanol output falls 6,000 bpd to 796,000 bpd
* Daily output lowest since records began in June 2010 (Revises headline, adds graphic, analyst quote)
By Michael Hirtzer
July 25 (Reuters) - U.S. ethanol production fell last week to the lowest level in at least two years, posting a sixth straight week of decline as surging corn prices and tight supplies of the grain squeezed margins at biofuel refineries, government data showed on Wednesday.
Ethanol production fell 6,000 barrels to 796,000 barrels per day in the week ending July 20, the lowest weekly total since the U.S. Energy Information Administration began tracking the data two years ago.
It was the second consecutive week that production hit the lowest weekly total on record.
However, the 0.7 percent decline in production was the smallest drop in more than a month. Stocks of the fuel fell 551,000 barrels to 19.01 million barrels, the data showed.
Margins improved, even though many plants are still operating in the red. In Illinois, the average margin was about a negative 25 cents per gallon produced, but that was better than the negative 62 cent margin of earlier this month, according to Thomson Reuters data.
Chicago Board of Trade corn futures hit an all-time high of $8.28-3/4 per bushel on the final day of the reporting period as the most expansive U.S. drought in five decades reduced yields of the developing crop.
At least three U.S. ethanol plants, two in Nebraska and one in Indiana, are idled until profit margins improve.
"There is nothing wrong with talking of demand destruction at these prices (for corn). It is happening and will happen," said Allendale Inc analyst Rich Nelson.
"Ethanol is not the prime demand destruction argument (for corn) though. The energy market will give ethanol producers just enough to encourage production at the minimum mandate level," Nelson said. (Reporting by Michael Hirtzer in Chicago; Editing by Tim Dobbyn and Jim Marshall)