GRAINS-Corn dips after drought-led rally, up 38 pct in 3 weeks

* U.S. corn falls 1.6 pct as market takes breather
* New-crop corn up about 38 pct in 3 weeks of drought-led
rally
* Wheat rises 33 pct in 3 weeks, biggest in 16 years
* U.S. crops shrivel in record heat, f'cast of rains

(Adds details, quotes)
By Naveen Thukral
SINGAPORE, July 6 (Reuters) - Chicago corn slid almost 2
percent on Friday after recent steep gains, although prices were
set for their biggest three-week rally in 3-1/2 years, sparked
by the worst U.S. Midwest drought in nearly a quarter century.
Wheat also fell 2 percent but the market has risen 33
percent in three weeks, the most in 16 years, while soy eased
around half a percent after climbing to its highest in four
years in the last session.
Analysts said there were forecasts of cooler weather in the
U.S. grain belt over the weekend but much of the damage done was
irreversible.
"It is a little bit of a quiet which is not unexpected,
given the extent of the rally that we have seen, although
fundamentally the core issues within the grain market remain
firmly entrenched," said Luke Mathews, a commodities strategist
at the Commonwealth Bank of Australia.
"There are growing fears that significant demand destruction
will be required over the next 12 months to prevent U.S. corn
and soybean supplies from being exhausted."
Chicago Board of Trade new-crop December corn lost 1.6
percent to $6.97-1/4 a bushel by 0256 GMT, after hitting a
contract high of $7.13 a bushel on Thursday. Front-month corn
slid 2.3 percent, easing from its highest since June last
year.
The most-active November soy fell 0.5 percent to
$15.18-1/2 a bushel, while September wheat lost 2.1
percent $8.20-1/4.
December corn has risen almost 38 percent in three weeks and
actively traded November soybeans are up more than 15 percent.
On a continuation basis, wheat has gained 33 percent
in three weeks, its biggest three-week rally since April 1996,
while corn has gained about 30 percent, its biggest rally since
2008.
The U.S. Midwest will remain extremely hot and dry in the
next few days, adding more stress to crops already damaged by a
summer heat wave, but some relief rains are expected over the
weekend, forecasters said.
The heat dome will hover over the Midwest until the weekend,
when temperatures were forecast to return to the mid-80s to the
low-90s F, which is considered to be normal for this time of
year, said Joel Widenor, a meteorologist for Commodity Weather
Group, a U.S. advisory.
Some relief rains will accompany the drop in temperatures,
he said. But the midday weather updates for the Corn Belt called
for the heat to return by the middle of next week.
With more acres of corn now entering the key phase of
pollination, the time when yields are set, every hot, dry day
reduces output.

OUTPUT ESTIMATES
Analysts have already cut their corn yield forecasts by more
than 6 percent since the start of the season, with further
downside expected as the scale of the damage becomes apparent.
The Commodity Weather Group said on Thursday it estimated the
U.S. 2012 corn yield at 152.2 bushels per acre.
But Brazil boosted its corn harvest estimate by 2.5 percent
to a record 69.48 million tonnes on Thursday.
The estimate represents a leap of more than 20 percent from
the previous season, when output reached 57.4 million tonnes,
and is up from a June estimate of 67.8 million, government crop
supply agency Conab said in its 10th revised estimate for
2011/12 grain output.
For wheat, there was bullish news from Argentina.
Argentina's 2012/13 wheat plantings are set to fall 20
percent this season to 3.7 million hectares, even less than
previously forecast, despite favorable crop weather, the Buenos
Aires Grains Exchange said.
The market will be closely watching for possible reductions
to U.S. corn and soybean yield estimates in the U.S. Department
of Agriculture's (USDA) monthly supply/demand report next
Wednesday. Historically, the USDA waits until August to adjust
yields.
Soybean prices have joined the rally over the past week,
surging to their highest since a 2008 record in the previous
session, as traders fear the U.S. Midwest drought may extend
into the pivotal pod-setting period next month.
Global supplies have already been strained by a shortfall in
Brazil and Argentina output due to a La Nina-driven drought.

Grains prices at 0256 GMT
Contract Last Change Pct chg Two-day chg MA 30 RSI
CBOT wheat 820.25 -17.75 -2.12% +2.63% 691.29 77
CBOT corn 697.25 -11.25 -1.59% +3.37% 588.70 82
CBOT soy 1518.50 -8.00 -0.52% +2.97% 1381.05 85
CBOT rice $15.07 -$0.08 -0.53% +0.43% $14.52 64
WTI crude $86.78 -$0.44 -0.50% -1.00% $84.09 61
Currencies
Euro/dlr $1.238 -$0.001 -0.09% -1.13%
USD/AUD 1.026 -0.002 -0.24% -0.07%
Most active contracts
Wheat, corn and soy US cents/bushel. Rice: USD per hundredweight
RSI 14, exponential

(Reporting by Naveen Thukral;Editing by Clarence Fernandez)