Jan. 14 (Bloomberg) -- Corn rose to the highest ever in Chicago on speculation that global demand for feed and biofuel will exceed production for the seventh time in the past eight years.

World inventories of corn will fall to the lowest since 1984 on Sept. 30, the U.S. Department of Agriculture said Jan. 11. Inventories in the U.S., the world's largest producer and exporter, will be 20 percent smaller than forecast last month, the USDA said. Prices have jumped 49 percent in the past five months, even after last year's record harvest.

``The decline in supplies was a shock to people that have to use these commodities,'' said Jeff Beal a consultant for Strategic Marketing Services Inc. in Rockford, Illinois. ``Exports have yet to slow, livestock producers have not started to liquidate, and demand for ethanol and other biofuels continues to grow with government subsidies.''

Corn futures for March delivery rose 17 cents, or 3.4 percent, to $5.12 a bushel on the Chicago Board of Trade. The price earlier jumped the exchange's 20-cent limit to $5.15, topping the record for a most-active contract of $5.135 reached in May 1996. The highest price for any contract was $5.545 for July futures in 1996.

Corn rallied 17 percent last year after surging a record 81 percent in 2006, on increased demand to produce ethanol and feed livestock and poultry.

Rising Feed, Fuel Costs

Smaller inventories may increase costs for hog processors such as Smithfield Foods Inc. and poultry producers including Pilgrim's Pride Corp., which say corn-based animal feed is their biggest expense. About 53 percent of the U.S. crop was used as animal feed last year and 20 percent was consumed to make fuel. Ethanol producers such as Archer Daniels Midland Co. may also face increased expenses.

Corn prices paid in cash to U.S. farmers will average a record $4 a bushel in the season that began Sept. 1, up from $3.65 forecast a month ago and up from $3.04 at the farm gate in the previous season, the department said.

The USDA said last year's U.S. corn crop totaled 13.074 billion bushels, 0.7 percent less than the 13.168 billion estimated in December. The crop would still be the biggest ever, up 24 percent from 2006 after farmers planted the most acres since 1944.

Farmers harvested an average 151.1 bushels an acre, less than the 153 bushels in the most-recent estimate and up from a yield of 149.1 bushels in 2006, the department said.

World Supply, Demand

The USDA estimated world corn output in the 2007-2008 season, which began Oct. 1, at 766.7 million metric tons, down from 769.3 million forecast in December. That compares with an estimated 703.9 million tons harvested last season. Global consumption will rise to 772.7 million tons, up from the 766.4 million forecast last month and 721.7 million consumed last year, the department said.

U.S. exporters reported sales of 116,000 metric tons of corn to South Korea, the USDA said today. South Korea is boosting purchase of U.S. corn after China imposed taxes on grains and oilseeds at the start of this year, Beal said.

China, the biggest consumer of grain and oilseeds, on Jan. 1 implemented a 5 percent tax on corn, rice and soybean exports and a 20 percent levy on wheat. The government last month sought to slow price increases by selling grain from stockpiles and canceling tax rebates. The yuan rose to the highest since a peg to the dollar ended in July 2005.

``Overseas buyers are looking to source grain outside of China,'' Beal said. ``Only U.S. supplies are available until South America starts harvesting'' in March, Beal said.

Corn is the biggest U.S. crop, valued at a record $33.8 billion in 2006 with soybeans in second place at $19.7 billion, government figures show. Wheat is the fourth-biggest crop, behind hay, with a value of $7.7 billion.

To contact the reporter on this story: Jeff Wilson in Chicago at jwilson29@bloomberg.net

Last Updated: January 14, 2008 14:55 EST