Unsold supplies of corn before next year's harvest will be 2.6 percent smaller than estimated a month ago, as demand for the grain to produce ethanol rises to a record, the government said Tuesday. The corn surplus on Aug. 31, the end of the marketing year, will be 1.719 billion bushels, down from 1.764 billion forecast in January and up from 1.673 billion a year earlier, the Department of Agriculture said Tuesday in a report. Analysts surveyed by Bloomberg News expected inventories of 1.747 billion bushels, on average. 'Corn used to make ethanol has been underestimated,' said Jerry Gidel, a market analyst for North American Risk Management Services in Chicago. 'Rising sugar prices are reducing Brazil's excess supplies of ethanol,' potentially increasing U.S. exports, Gidel said before the report. The amount of corn to be used to produce ethanol will be 4.3 billion bushels, up from the January estimate of 4.2 billion. A year earlier, a record 3.677 billion bushels were used for the biofuel. Smaller inventories may raise costs for processors of corn-based ethanol such as Archer Daniels Midland and for meat companies including Smithfield Foods and Tyson Foods, which say corn-based animal feed is their biggest expense. The USDA's estimate of 13.151 billion bushels for the 2009 crop was unchanged from last month and up 8.8 percent from 12.092 billion bushels in 2008. The government is scheduled to release its final estimate for last year's harvest on March 10 and its first forecast for this year's crop later this month. Corn exports will total 2 billion bushels by Aug. 31, down from 2.05 billion forecast in January and up from 1.858 billion bushels in the previous marketing year, the USDA said. About 5.55 billion bushels will be used for animal feed, the department said, unchanged from last month's estimate. The USDA estimated world corn production in the 2009- 2010 season, which began Oct. 1, at 797.8 million metric tons, up from 796.5 million tons forecast in January, on increased production in Argentina. A year earlier, global production was a record 791.5 million tons. China, the second-largest corn producer, will harvest 155 million tons, unchanged from January's forecast and down from a record 165.9 million tons a year ago, the department said. Global consumption will reach 809.7 million tons, up from 806.2 million estimated last month and an increase from 775.2 million last year, the USDA said. It would be the first time in three years that world consumption exceeds production. World inventories before the next harvest in the Northern Hemisphere will total 134 million tons, down from 136.2 million tons estimated in January and less than 145.9 million in the previous year. With assistance from Alan Bjerga in Washington. 