* USDA to update world, US crop and use outlook at 0830 ET
* No relief for smallest US corn stocks in 15 years-Poll
* Sky-high grain markets fuel rise in world food prices
* Winter drought may hurt China wheat crop, warns FAO
By Charles Abbott
WASHINGTON, Feb 9 The U.S. government is set to forecast still tighter supplies of corn and wheat this year in a monthly report on Wednesday, underscoring the precarious balance in world grain markets that has unnerved importers.
Grain prices have surged since last year to near record highs of 2008 as drought and floods cut into the world's crops while feed, food and fuel demand races ahead, stoking prices and sparking unrest in some Arab countries and elsewhere.
The U.S. Department of Agriculture's regular report on the state of global supply and demand may add to the growing sense of anxiety, trimming its view of U.S. ending stocks by 2 percent to 728 million bushels, the smallest since 1995.
"We can see '95 from here," said agricultural economist Pat Westhoff, of a University of Missouri think tank, referring to the year in which a drought slashed production.
He said supplies would be "about as low as you can go" before the new crop is ready for harvest in September. The United States is the No 1 agricultural exporter.
The USDA may also marginally trim its forecast for domestic wheat supplies, which are still comfortably above levels three years ago that triggered a full-blown global crisis.
Forecasts for USDA report: r.reuters.com/jaq87r
Preview on wheat stock forecast: [ID:nN07234020]
Preview on soy stockpile forecasts:[ID:nN0723342]
Preview on corn stock forecast: [ID:nN07232331]
The February report is not typically a major event for agricultural markets, as it largely reflects perceived changes in the global market since a month ago without offering new data on the U.S. situation.
Traders are instead looking keenly ahead to the agency's first projections for 2011 crop on Monday, anticipating the need for a 3-4 percent expansion in corn, wheat and soybean sowing will be needed in order to assure adequate supply.
ETHANOL, FEED USE
Corn is being drawn down by strong demand drivers at home. Ethanol's share is poised to grow after the Environmental Protection Agency approved use of a higher 15 percent blend ratio in gasoline for older cars.
And near record meat prices are encouraging ranchers to expand herds or fatten livestock for slaughter.
USDA projected corn-for-ethanol at 4.9 billion bushels, or nearly 40 percent of the 2010 corn crop, up from 4.568 billion bushels, or 35 percent, of the 2009 crop used for the biofuel.
An ethanol trade group says production may hit 13.5 billion gallons this year, compared to 13 billion gallons in 2010.
LATEST WHEAT WORRY: CHINA
World wheat output tumbled last year as drought withered crops in Russia and massive floods swept Australia, a major producer. Prices have rallied this year as North African and Middle East countries race to build up higher buffer stocks.
Traders expected the USDA would lower its stockpile forecast to 177.3 million tonnes, down 600,000 tonnes.
Adding to the world's woes is news the world's most populous country, China, desperately needs rain or it will also be looking to feed itself through imports.
A severe winter drought in the North China Plain "is potentially a serious problem" for one of the world's largest wheat-growing nations, said the U.N. Food and Agriculture Organization on Tuesday. Five provinces that account for two-thirds of Chinese output are affected. One of them, Shandong, is the second-largest corn-grower.
Traders also expect the USDA to adjust its estimates for production from the top Latin American exporters, which appear to have weathered the worst of the La Nina phenomenon that had threatened to curtail crops with dry weather.
Although the USDA will likely trim its Argentina soybean crop forecast by 3 percent from last month to 49.2 million tonnes due to hot weather, it will upgrade the Brazilian crop by 1 percent to 68 percent, analysts said ahead of the report. (Editing by Russell Blinch and Sofina Mirza-Reid)