Chicago corn futures reached $7 a bushel for the first time since July 2008 after the government cut its estimate for U.S. supplies.

At the end of the 2010-11 marketing year Aug. 31, the nation’s corn stockpiles are expected to drop to 675 million bushels, a 15-year low, according to the U.S. Department of Agriculture’s monthly supply and demand report.

The USDA’s estimate is down 70 million bushels from a January forecast and more than seven times the decline expected by most analysts.

At Wednesday's close, corn futures for March delivery rose 24¼ cents to $6.98 a bushel, after touching $7.00¾, the highest for a contract closest to expiration since prices topped $7.51 in early July 2008. Corn futures, which hit a record $7.65 a bushel in June 2008, are up 95 percent over the past 12 months.

Smaller corn supplies reflect a heavy August rains in parts of the Midwest that hurt last year’s crop, as well as record ethanol production. Today’s report shows little demand “rationing,” meaning the major corn users have yet to cut back even with high prices, analysts said

“The USDA does not provide any evidence of demand destruction despite recent elevated levels” for corn prices, Rabobank Group analysts said in a report today.

“This sends strong signals that demand remains robust, and that large planted areas are needed this spring in the major commodities to replenish the low inventory levels and ensure sufficient supply for the new season,” Rabobank said.

Corn stocks as a percentage of use, a key gauge of supply tightness, are expected to be 5 percent at the end of 2010-11, matching the record low set in 1995-96, according the USDA. Ending stocks at 675 million bushels would amount to a little over 18 days’ supply, compared with nearly 48 days’ worth at the end of 2009-10.

The ethanol industry this year will use an estimated 4.95 billion bushels, up 50 million bushels from a previous estimate, the USDA said.

While rising corn prices have lowered margins for ethanol blenders, “incentives remain in place and export demand prospects remain strong with sugar-based ethanol uncompetitive at current sugar prices,” the USDA said today.

“Corn costs for many ethanol producers and other end users may also be below spot values to date as a substantial portion of this year’s crop appears to have been forward priced,” the USDA said.

Many farmers are comfortable holding on to grains, with tight stocks promoting a bullish attitude to trend higher, said Jason Roose, analyst at U.S. Commodities in West Des Moines, Iowa.

Commercial inventories of U.S. cash grain declined last week. Elevators, terminals, ports and warehouses surveyed by the Department of Agriculture were filled to 70% of holding capacity, down two percentage points from the previous week.

Export demand and concerns about planting continue to push U.S. cash prices for hard red spring wheat to nearly three-year highs. Demand for spring wheat, a high-protein variety grown in the northern Plains, has been strong after rains lowered the quality of wheat in Canada and Australia.

Spring wheat is benefiting from seasonal trends as well, with traders concerned about the ability to replenish supplies in the face of strong demand, with spring wheat still weeks away from planting and months away from harvest.