UPDATE 3-Shrinking US grain supply shocks market, prices surge

* Smallest US corn stocks since 2004 -- less than 1 bln bu
* Tight corn, soy supplies forecast throughout 2012/13
* Corn futures rise, hit ceiling for daily price rise
* USDA data show feeders used wheat when corn was costly

(Updates throughout)
By Charles Abbott
WASHINGTON, Sept 28 (Reuters) - U.S. corn and wheat
stockpiles shrank far more than expected this summer, the
government reported on Friday, reigniting a rally in grain
prices on fears that strong demand and drought-decimated crops
will keep markets tight.
Corn futures surged nearly 6 percent on the Chicago
Board of Trade after the U.S. Department of Agriculture reported
corn stocks on Sept. 1 were below 1 billion bushels for the
first time in eight years. Wheat futures rose more than 5
percent, topping $9 a bushel after the data showed stockpiles
were 7 percent less than forecast.
The ending-stock figures showed that record-high corn prices
during the quarter had failed to put as big a dent in demand as
analysts expected, suggesting that prices may need to rise
higher still in the coming months to ration demand amid
heightened competition for food, livestock feed and ethanol.
The data are likely to revive global concerns over rising
food prices and supply security, and may renew calls to ease the
U.S. ethanol mandate that many blame for driving up prices.
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IGC cuts forecasts for world maize, wheat crops

USDA surprises again with low corn stock report

GRAINS-Corn rallies limit-up on USDA data

Japan corn users ask US to ease biofuel mandate

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While consumers have been bracing for higher prices after
the worst U.S. drought in half a century withered corn and
soybean crops this summer, Friday's data shows the margin of
error in supplies is even thinner than many feared.

"DOWN TO THE RIND" ON CORN AND WHEAT SUPPLY
"We may be getting down to the rind of the watermelon on the
corn and wheat," said Jim Gerlach, A/C Trading in Fowler,
Indiana.
After weeks of easing prices, the tide may be changing, he
said: "Personally, I'm moving toward a buy weakness opposed to
selling strength."
USDA's survey of farmers and warehouses showed 988 million
bushels of corn on hand -- 11 percent less than expected -- on
Sept. 1. That date is the start of the corn marketing year and
the traditional low point for supplies, as it comes before this
year's harvest gets added to the stockpiles.
Wheat stocks of 2.1 billion bushels were 7 percent smaller
than traders expected. Soybean stocks were much larger than
expected.
It was the third straight year that the USDA's September
inventory report surprised traders. The unexpectedly low corn
number is all the more shocking as many analysts were bracing
for a higher figure, artificially inflated by the unusually
early harvest that is bringing "new crop" supply into
inventories.

MORE WHEAT FOR FEED, BUT NOT ENOUGH
But supplies shrank. Even with corn prices soaring to $8 per
bushel earlier this year, demand remained heavy from exporters,
livestock farmers, ethanol plants and food makers.
Corn consumption from June-August was 15 percent smaller
than the same period a year ago, yet not enough to prevent low
stocks. USDA chief economist Joe Glauber said the corn and wheat
stocks figures showed demand was larger than expected,
especially for livestock feed.
"We're going to hear talk that we're going to have to do a
better job of rationing in the feed sector. That's not easy to
do," said Don Roose, president of U.S. Commodities.
Corn futures were limit up -- at the daily ceiling -- at
$7.56-1/2 a bushel in Chicago at midday. "Synthetic" bids, from
the options market, indicated corn was worth up to $7.60 a
bushel. Wheat futures ended the day at $8.99-1/2 a bushel, up 5
percent. Soybeans closed at $15.98, up 1.7 percent.
Wheat consumption was up by 27 percent for June-August
compared to one year ago, USDA said. Agricultural economist
Darrel Good of the University of Illinois estimated 435 million
bushels of wheat, twice the usual amount, was fed to livestock
in the three-month period.
"Wheat is corn again," said Jason Kitt of The Linn Group.
Livestock feeders use wheat as feed when corn is scarce and
expensive. While U.S. corn production is down for the third year
in a row, growers harvested 2.27 billion bushels of wheat this
year, the largest crop in eight years.

ETHANOL IN FOCUS?
Six key groups of corn users in Japan, the largest importer
of the coarse grain, asked Washington to consider a two-year
waiver of the U.S. requirement to mix ethanol in gasoline. They
said high corn prices put "great pressure" on Japanese
industries and could cut U.S. sales permanently.
U.S. food producers also hope they can reduce pressure on
corn supplies by convincing the U.S. government to relax the
ethanol mandate.
Governors of seven U.S. states have petitioned the Obama
administration to ease the mandate, saying high corn prices were
punishing beef, pork, poultry and dairy farmers. Grain supplies
data could play a part in the decision, possible in November.
U.S. meat production is projected to fall modestly this year
and by 2 percent in 2013 because of high grain prices.
Soybean stockpiles totaled 169 million bushels at the start
of this marketing year, much larger than expected, despite heavy
consumption late in the 2011/12 marketing year.
USDA also revised its estimate of the 2011 soybean crop to
3.09 billion bushels, up 1 percent. The 37 million-bushel
increase was roughly the same as the difference between the
stockpile figure and trade expectations for stocks.

(Reporting By Charles Abbott and Emily Stephenson; Editing by
Sofina Mirza-Reid and David Gregorio)