My dad works in the Ethanol industry (more specifically, he "sells" ethanol plants). They are buidling huge plants all over the midwest (400 gallon/day is considered to be a small-moderate size). I do believe that a good portion of the fuel is going back into agriculture right now. Most of the ethanol plants being built are paid for by farmer's co-ops. Once that market gets a bit mroe saturated I would expect to see more and more availability of the fuel. I do expect that auto manufacturers will be continuously improving the effiency of the engines.
One of the big keys is that the mass production of ethanol is only feasable with the price of gas abover $1.75/gallon, which right now is fine, but prices have fallen drastically over the past few weeks (there are areas in SE Missouri/NE Arkansas that are under $2/gallon).