Grain futures in Chicago plunged after the U.S. Department of Agriculture predicted a record corn harvest and unexpectedly boosted its supply projections, signaling strain on tight stockpiles is easing as high prices curb demand.

Total use of U.S. corn is expected to decline 0.7 percent in the year beginning September 1, the first drop in three years, as livestock feeding declines and exports drop to a nine-year low, according to estimates in the USDA’s monthly Supply and Demand report released May 11:

In the same report, the USDA estimated farmers will harvest 13.51 billion bushels of corn in 2011, which would be up 8.5 percent from 12.45 billion bushels in 2010 and surpass the current record, 13.09 billion bushels in 2009.

Analysts deemed the numbers largely bearish over the near-term for grain markets, indicating that beef, dairy and pork producers will see further relief from soaring feed costs as corn prices tumble from record highs reached in April. Still, corn stockpiles are likely to remain historically tight, the USDA said, keeping prices into 2012 at nearly double the levels from a few years ago.

The USDA “is betting that usage is going to slow” for corn, said Jason Ward, an analyst with Northstar Commodity Investment Co. in Minneapolis, Minn. “Now, the proof is in the pudding… if prices go down, usage is going to increase.”

In a separate May 11 report, the USDA forecast 2011 U.S. winter wheat production at 1.42 billion bushels, down 4.1 percent from 2010 and the smallest since 1.29 billion bushels in 2006. Dry weather in the major wheat areas of the Southern Plains led to poor growing conditions, the USDA said:

In trading May 11, corn futures for July delivery on Chicago-based CME Group fell 30 cents to a six-week low at $6.77 ¼ a bushel. Corn futures, which hit an all-time high of $7.83 ¾ on April 11, are still up 91 percent since mid-2010.

July soybean futures in Chicago 6 ¼ cents to $13.31 ¾ a bushel. In Kansas City, hard red winter wheat futures for July delivery fell 28 ½ cents to $9.00 a bushel.

Corn production is expected to increase after high prices prompted farmers to step up plantings this spring, although wet, cold conditions in much of the Midwest have slowed fieldwork. U.S. corn yields are also expected to improve, to an estimated average of 158.7 bushels per acre, the third-highest on record, the USDA said.

The USDA forecast U.S. corn stocks at the end of the 2010-11 marketing year Aug. 31 at 730 million bushels, up from an estimate of 675 million bushels a month ago. Analysts expected a reduction of about 10 million bushels.

Those supplies, known as ending stocks, would still be the lowest in 15 years and would be down 57 percent from 1.71 billion bushels at the close of 2009-10. For 2011-12, the USDA said ending corn stocks will rise to an estimated 900 million bushels.

USDA supply numbers imply “quite a bit of rationing” of corn demand, referring to the prospect that high prices will force cutbacks by some grain users, Ward said.

“There’s not a lot of room for adversity” with this year’s crops, Ward said. The stocks data “assumes some pretty low usage… (but) feed and exports are as low as they can go.”

Feed use in 2011-12 is expected to decline 1 percent, to 5.1 billion bushels, the USDA said, while exports are predicted to fall 5.3 percent, to 1.8 billion bushels, the lowest since 2002-03. Meanwhile, the ethanol industry’s corn consumption is expected to expand further, hitting a record 5.05 billion bushels next year, the USDA said.

Competition for the U.S. corn supply shows few signs of letting up, some analysts say.

Ward said that even with expensive corn, his cattle and hog feeder clients are still profitable and haven’t slowed their operations. Many livestock producers took advantage of the recent drop in corn prices to buy additional supply at cheaper levels, he said.

The price decline “got everybody healthy again,” Ward said. “For the USDA to assume less use from the livestock sector, that’s a stretch.”

Average farm prices for corn are forecast to range from $5.50 to $6.50 a bushel next year, up from $5.10 to $5.40 in 2010-11 and up from $3.55 in 2009-10, the USDA said.

Rich Feltes, an analyst with R.J. O’Brien & Associates in Chicago, noted the USDA reduced its corn harvest outlook from a February forecast for a 13.76 billion-bushel crop. With grain and livestock prices expected to stay elevated, consumers probably will continue to face higher grocery bills, he said.

The “bottom line,” Feltes said in a report, is “not much relief today for end users and policy makers concerned over food inflation.”

This year’s soybean harvest is estimated at 3.29 billion bushels, down 1.2 percent from last year, the USDA said. Estimated soybean ending stocks for 2010-11 were raised 21 percent, to 170 million bushels.