US corn stocks ratio nears low set in Depression

* US corn end stocks seen off 9 pct; trade expected 2 pct

* US corn prices hit 2-1/2 year high, $7.00-3/4 a bushel

* Corn stocks/use ratio falls to 5 pct, matches 95/96 low

* Higher ethanol, HFCS output draws down stocks

* USDA's Vilsack says ample corn for food, feed, fuel (Analyst says ethanol policy is resistant to change)

By Charles Abbott

WASHINGTON, Feb 9 (Reuters) - The U.S. government slashed its forecast for corn stockpiles 9 percent on Wednesday, projecting the tightest supply since the Great Depression as a record amount of the crop is used to make ethanol.

Corn prices in Chicago jumped to their highest level since July 2008 following the Agriculture Department report, which threatened to rekindle heated debate about using crops for fuel as food prices soar and big importing countries scramble to build up grain supplies in order to head off civic unrest.

Global grain supplies have been tightening for months as droughts and floods coupled with unrelenting demand for feed, food and fuel caused wheat and corn prices to more than double from last summer's lows. But traders had not expected such a deep cut in corn inventories in Wednesday's data.

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For a suite of graphics on salient USDA data:

http://graphics.thomsonreuters.com/11/02/usdacrop.html

For an INSTANT VIEW on trader reaction: [ID:nN09204933]

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In the latest in a series of surprises, USDA slashed its end-stocks estimate by 9 percent to 675 million bushels. End-stocks represent the amount of corn that will be left in bins by the time the new harvest begins in September.

If realized, the number would be equivalent to just 5 percent of annual demand, equal to the tight supplies in the 1996 marketing year and barely larger than the 4.5 percent of 1937, during the economic chaos of the Great Depression.

USDA said stocks would be reduced as the amount of corn distilled into ethanol exceeds expectations. The agency raised its corn-for-ethanol estimate by 50 million bushels from the 4.9 billion bushels estimated in January.

It cited record-large ethanol output in December and January and the Environmental Protection Agency's decision to allow up to 15 percent ethanol blended in motor fuel, up from the standard 10 percent.

The clear link between U.S. ethanol -- which is now set to consume 15 percent of world corn supply -- and diminishing global crop stocks could revive the food-versus-fuel debate.

SHADES OF 2008

Some analysts see parallels to the last food crisis in 2008 and believe unrest sweeping Egypt and other Middle Eastern countries was sparked in part by surging food prices.

Opposition to tax credits worth $6 billion a year and federal ethanol mandates could build in Congress. But the industry enjoys strong support from farm state lawmakers and from the White House, so few see an immediate push for changes despite increased Republican presence on Capitol Hill.

"Ultimately what has to happen is that the Washington people get the message on corn ethanol or biodiesel and somehow have to slow the mandates going forward," said Daniel Basse, president of AgResource Co, a forecasting company.

But Basse, attending a conference in Palm Beach, Florida, added it will take a calamity for the government to act. "I think it takes a Midwest drought to send that message."

"The best voices for demanding change are U.S. consumers themselves, but that will require a food price spike larger than the 2-3 percent currently forecast by USDA," said Gary Blumenthal of World Perspectives, a private consultancy.

Joe Glauber, USDA chief economist, said in an interview that corn stocks would remain tight into 2012. Some rebuilding is likely with this year's crop "but we're obviously going to need a lot more corn acreage" in the face of strong demand.

Most analysts had not expected a rapid increase in higher ethanol blends due to fierce resistance from automakers and retailers who fear the hotter-burning mix could damage car engines and void warranties, despite government tests to ensure it is safe.

Ethanol is a darling of the corn-growing U.S. Midwest, where it is praised as a creator of rural jobs and a multibillion dollar boost to farm income. There is no other home-grown alternative to imported oil, say ethanol fans.

The USDA made only marginal changes in its outlook for wheat and soybean crops, as expected, but those prices also rallied as surging corn prices were likely to stoke even fiercer competition for cropland among U.S. farmers who are now beginning to make spring planting decisions.

FORWARD PRICING PROTECTS MARGINS

If USDA's estimate proves true, corn-for-ethanol usage would set a record this marketing year. Some 4.568 billion bushels was used in the previous year.

"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," said USDA, suggesting that ethanol makers can turn a profit despite rising corn prices.

More corn also will be used to make high fructose corn syrup, USDA said, pointing to strong shipments of the sweetener to Mexico. An upturn in industrial production will boost demand for starch from corn, said USDA, as it allotted an additional 20 million bushels for HFCS and starch.

World corn stocks will drop by 3.5 percent, or 4.5 million tonnes, to 122.5 million tonnes, USDA said, due to smaller stockpiles in the United States and Brazil.

(Source: http://www.trust.org/alertnet/news/us-corn-stocks-ratio-to-match-lowest-since-depression)