Corn prices surged Thursday after the government lowered its estimate for this summer's crop and predicted global inventories will remain tight in 2012.

Corn settled up 2.8 percent Thursday at $7.855 a bushel.

The U.S. Department of Agriculture predicted U.S. corn stockpiles will total 695 million bushels in 2012. The total fell 205 million bushels from its previous estimate after heavy rains delayed spring planting in the eastern Corn Belt and Northern Plains.

The estimate is important because the U.S. is the world's No. 1 corn exporter. Corn stockpiles are already short, and analysts have said for months that the U.S. needs to produce as much corn as possible this summer to offset tight supplies as demand grows stronger from other nations, ethanol producers and livestock owners.

The agency forecast global corn supplies at 111.9 million tons next year, which will be the lowest inventory since 2006-2007 if the prediction holds through the growing season.

China's production was expected to increase, but the department said that will be offset by higher consumption, leaving inventory at 51 million tons in 2012, just below the previous two years.

"We are on the precipice of a very severe situation in the corn market," said Richard Feltes, vice president of research at R.J. O'Brien& Associates.

"The outcome of the 2011 growing seasons in both China and the Midwest corn belt are going to be critically important to food supplies, food inflation, the whole fragile economic recovery," he said. "It's a real domino effect here all hinging on the weather here coming up in the next 90 days."

In other agricultural contracts for July, wheat slipped 3 cents to $7.45 a bushel and soybeans fell 7.75 cents to $13.9375 a bushel.