Corn prices are heading toward record highs with U.S. supplies expected to be “incredibly tight” this year and exports and ethanol production on pace to exceed government forecasts, Rabobank Group analysts said.

Demand for corn has yet to show significant declines even as prices climbed above $7 a bushel, Rabobank analysts led by Luke Chandler said in a March 3 report. Oil’s push above $100 a barrel boosted ethanol distillers’ margins, encouraging production of the gasoline additive, the analysts said.

At the current production rate, U.S. ethanol makers’ corn use during the 2010-11 marketing year will exceed the U.S. Department of Agriculture’s estimate, 4.95 billion bushels, a record, by as much as 100 million bushels, Rabobank said.

“Our bullish outlook for corn prices into (the second quarter) is maintained,” Rabobank said. “The U.S. corn balance sheet is already forecast to be incredibly tight this season,” they said, with 2010-11 ending stocks “projected to fall to wafer-thin levels.”

U.S. corn stockpiles on Aug. 31, the end of the 2010-11 marketing year, will fall to 675 million bushels, a 15-year low, according to a USDA forecast. That would be about 18 days’ supply, based on projected usage rates, compared with 48 days last year.

The prospect for even pricier grain is troubling for beef, dairy and pork producers, who’ve watched feed costs soar and profits shrink as corn rallied sharply since last fall. Corn futures have more than doubled since the middle of 2010, reaching a 32-month high of $7.34 ¾ on March 4, based on the closest-to-expiration Chicago futures contract.

Dwindling supplies, both in the U.S. and globally, prompted Rabobank to revise its grain price forecasts higher.

Corn is expected to average $7.25 a bushel during the second quarter and $6.75 a bushel during the third quarter, based on central U.S. cash prices, Rabobank said. During the first quarter, corn is projected to average $6.85.

In December, Rabobank projected average corn prices at $5.80 and $5.50, respectively, for the second and third quarters.

Chicago corn futures in June 2008 reached $7.65, a record high unadjusted for inflation. Near the close of trading March 4, March corn futures fell 8 ½ cents to $7.21 ¼. July corn fell 7 ¾ cents to $7.32 ½.

High prices are expected to encourage farmers to plant more corn this spring. The USDA last month projected corn plantings at 92 million acres, up 4.3 percent from 2010. But even with an improvement is yields, supplies will likely remain tight, Rabobank said.

A repeat of last year’s disappointing yields “would result in widespread demand destruction given the incredibly tight supply situation,” Rabobank said.

Overall, Rabobank looks for agricultural commodities to retain a bullish bias in coming months, although bouts of speculator selling in response to global events may cause short-term price dips. However, the bullish fundamentals will ultimately prevail, they said.

“With buffer stocks of many agricultural products critically diminished, volatility has risen and is expected to stay elevated,” Rabobank wrote. “Due to growing demand and very low inventories, the price signal to encouraging farmers to produce and increase harvests will have to remain elevated into next season to ensure adequate supply.”