U.S. grain and soybean futures rallied Wednesday, led by soaring corn prices on strong demand and supportive supply outlooks.

Increased ethanol demand drove corn prices higher as producers continued to gobble up high-priced corn to make the biofuel. Ethanol production rose to 915,000 barrels a day last week, up 0.7% from the previous week and 9% from a year earlier.

The rise in demand came as concerns intensify about shrinking supplies of corn, which are projected to reach a 15-year low before the next harvest.

Grain users are increasingly paying higher prices for corn on the cash market than the futures market as supplies dwindle.

The drawdown in ethanol stockpiles despite higher production is a reflection of strong corn demand, said Mike Zuzolo, president Global Commodity Analytics and Consulting in Lafayette, Ind. Corn is the primary input for ethanol production in the U.S.

The strong demand base adds to growing concerns federal forecasters will tighten supply outlooks when the U.S. Department of Agriculture releases its update on supply and demand Thursday.

Analysts expect the government to cut its forecast for corn inventories for the upcoming crop year by 11% to 800 million bushels and its forecast for current-year inventories by 2% to 715 million bushels, according to a Dow Jones Newswires survey.

"There is general market sentiment that Thursday's report will be supportive, producing a theme of traders taking a bullish stance heading into the report," said Shawn McCambridge, senior grains analyst with Prudential Bache in Chicago.

Speculative funds were estimated buyers of 18,000 corn contracts, a large number for daily trading, traders said.

Tight supplies, with the 2011 U.S. corn season not off to an optimal start, raised fears among grain users about where they will source corn before the new crop starts rolling in during the late summer.

Further support was derived from a swift turnaround in crude oil futures, a feature that helped kick off a broad base rally in commodities, Zuzolo said.

These issues briefly pushed the spot July contract up 30 cents, the maximum amount allowed under exchange rules.

Chicago Board of Trade July corn climbed 27 1/2 cents or 3.7% to $7.64/bushel.

U.S. wheat futures closed higher on spillover support from a rally in the corn market. Corn's gains lift wheat as market participants expect livestock producers will increasingly feed wheat to animals and cut back on corn feedings. CBOT July wheat rose 14 1/4 cents to $7.48/bushel while Kansas City Board of Trade July wheat gained 10 1/2 cents to $8.85 and Minneapolis Grain Exchange July wheat surged 36 3/4 cents to $10.21 1/2.

U.S. soybean futures followed corn's lead, with the uncertainty of acreage and production in the face of tight supplies coupled with spillover strength from rebounding crude oil futures underpinning prices, analysts said. CBOT July soybeans ended up 0.5% at $14.01 1/2 a bushel.

Other Markets

Soymeal futures rallied with soybeans, garnering additional support from concerns about tightening supplies on reduced transportation capabilities and the possible closure of some soy processing plants due to Missouri River flooding, analysts said. CBOT July soymeal ended up 1.2% at $372.80/short ton, and July soyoil settled up 0.02% at 57.94 cents/pound.

U.S. rice futures ended higher, taking their cue from rallies in the wheat and corn markets, with traders also worried about the potential for declining grain inventories ahead of a monthly USDA supply-and-demand report. CBOT July rice rose 1/2 cent to $14.77 1/2 per hundredweight.

Ethanol futures rose Wednesday, supported by rallying corn prices and supportive production and inventory data. Ethanol for July delivery gained 2.4%, to $2.684 per gallon. Oat futures rallied with other grains, supported by ongoing concerns about production due to planting issues in the U.S. northern plains and Canada, McCambridge said. The July contract jumped 12 cents, or 3.2%, to $3.83 a bushel.