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UPDATE 2-ADM says 21 percent of U.S. ethanol capacity idle

(Adds background; estimate, quote from industry group)

CHICAGO/NEW YORK, Feb 3 (Reuters) - U.S. ethanol producer and grain processor Archer Daniels Midland Co ADM.N said on Tuesday nearly 21 percent of U.S. ethanol production capacity has been shut due to weak demand and poor margins.

U.S. ethanol plants with a production capacity of 10.2 billion gallons per year are currently operating, down from a peak of 12.9 billion sometime mid-to-late last year, ADM Executive Vice President John Rice said on a conference call with analysts.

U.S. capacity to make the alternative fuel rocketed last year as companies raced to build plants amid generous government incentives designed to begin to reduce the country’s dependence on oil imports.

The oil price crash and credit crunch, however, proved too much for some producers. Many also have struggled with volatile prices for corn, from which most U.S. ethanol is made.

Even with the tough times, a few plants are still opening as producers hope that U.S. mandates for traditional ethanol, which are set to increase every year until reaching a peak of 15 billion gallons per year in 2015, will help fuel demand to recover.

“We are on pace to finish our ethanol plants,” Rice said about ADM’s two new distilleries.

ADM’s numbers on national idled plant capacity were more aggressive than those from the Renewable Fuels Association, an industry group . After ADM released its numbers, the RFA revised its operating ethanol plant capacity downward to just under 10.3 billion gallons annually, from 10.37 billion gallons.

After filing for bankruptcy protection in October, VeraSun Energy Corp VSUNQ.OB has shut 12 out of 16 ethanol plants. The company, which used to be the second largest U.S. producer of the fuel, suffered from costly hedging bets on the price of corn and the credit crunch.

Since then a string of plants have filed for bankruptcy protection, including a subsidiary of Panda Ethanol Inc PDAE.OB, Northeast Biofuels and, last week, the private Wisconsin distiller Renew Energy LLC.

“Will we see the same growth in the ethanol industry we saw last year? No, and that’s not necessarily a bad thing,” said Matt Hartwig, an RFA spokesman.

He said many of the downed plants were in “hot idle,” meaning they can be fired up to work at full rates within a few days, if demand rises. “If the economy rebounds ... ethanol will move forward,” he said.

Under the 2009 U.S. Renewable Fuels Standard, refiners and fuel blenders are required to blend 10.5 billion gallons per year of traditional ethanol into gasoline in 2009.

If U.S. capacity to make the fuel falls short, it could mean the country will import more ethanol from Brazil. If ethanol supply gets too tight, the U.S. Environmental Protection Agency has the power to waive federal mandates. (Editing by Walter Bagley)