* Soybeans ends 1.3 pct higher as demand returns
* Weaker dollar adds support in risk-on trade
* Canada's canola crop smaller than expected
* Corn ends flat, wheat lower (Adds snowstorm in upper Midwest, corn and wheat closes)
By Karl Plume and K.T. Arasu
CHICAGO, Oct 4 U.S. soybeans rallied 1.5 percent on Thursday, gaining for a second straight day, on evidence of strong export demand after prices tumbled to a three-month low and on a surprise drop in the size of Canada's canola crop due to weather damage.
Soybeans were also boosted by investors shedding their dollar holdings in favor of risk assets like commodities as European Central Bank President Mario Draghi vowed to preserve the euro as Europe battles its debt crisis.
The dollar index, a measure of value against major currencies, tumbled 0.74 percent by the afternoon. The greenback typically has an inverse relationship with grains as a drop in the dollar can make U.S. crops competitive in export markets.
Corn futures at the Chicago Board of Trade finished the day flat, erasing gains posted earlier in the session as the harvest in the Midwest farm belt advanced at a record pace. Wheat futures gave up gains to end lower as soybeans pared gains.
The season's first snowstorm and cold snap was sweeping into the northern Midwest but analysts were expecting only minor damage, if any, to the corn and soybean crops. The storm was centered in northwestern Minnesota and northeastern North Dakota, both among the top 10 soybean growing states.
As of Sunday, 36 percent of North Dakota's corn crop and 80 percent of the soy crop had been harvested, according to USDA data. In Minnesota, 53 percent of the corn crop and 76 percent of the soybeans had been cut.
Two reports issued on Thursday morning helped to rally soybean futures at the Chicago Board of Trade.
BOOST FROM EXPORTS, CANOLA
A weekly report from U.S. Department of Agriculture showed export sales of soybeans last week at 1.3 million tonnes, the most in three months and above trade estimates for between 800,000 and 900,000 tonnes.
The data showed that China, the world's top importer of soybeans and the No. 1 U.S. market, bought the bulk of last week's exports, booking 1.03 million tonnes.
While the large sale helped to ease concerns that imports by China would wane as its economic growth slows, it also reinforced the need to temper demand with higher prices so that there will be enough buffer stocks in the United States.
At the same time the export sales data was issued, Statistics Canada estimated canola production in that country at 13.36 million tonnes this year, down 2 million tonnes from its Aug. 22 estimate and more than 1 million below trade estimates.
A smaller canola crop in Canada could shift some of the demand for the oilseed to U.S. soybeans.
"The market was led higher by the export sales and Statscan numbers," said futures specialist Sterling Smith of Citigroup.
Benchmark CBOT November soybean futures rose 19-3/4 cents, or 1.3 percent, to end at $15.51-1/2 a bushel. Profit taking pared gains from the session high of $15.68-3/4.
Soybeans have slumped 13 percent from a record high $17.94-3/4 set on Sept. 4 in a selloff triggered by anecdotal accounts of higher-than-expected U.S. crop yields.
CBOT December corn rose 1/4 cent to end at $7.57 a bushel and December wheat fell 3-3/4 cents to $8.69-1/4.
The U.S. Grains Council on Thursday said it was expecting China to produce a record corn crop this year. Its forecast was based on a crop tour of growing regions in the country that has emerged as a major corn importer over the past two years.
Chinese imports of U.S. corn this year have, however, waned as prices rose to record highs this summer due to the worst U.S. drought in half a century.
The council said China had enough corn to meet demand this year, but the country could import supplies to build its reserves, which are used to temper domestic prices. (Additional reporting by Michael Hogan in Hamburg, Naveen Thukral in Singapore; Editing by Jason Neely, David Gregorio, Bob Burgdorfer and Jim Marshall)