The price of ethanol has been driven up because major oil refiners are suddenly buying in bulk. They're stocking up on ethanol as a replacement for MTBE, a petroleum-based additive suspected of causing cancer. MTBE and ethanol boost the octane of gasoline and can reduce pollution.
So, even though it's cheaper to make and therefore should be cheaper at the pump, we can thank the refineries (i.e. the oil companies) for making sure that gouging stretches to E85 pumps as well.