* USDA slashes US corn crop estimate, cuts soy crop
* USDA corn yield forecast below trade estimate
* CBOT corn futures end lower after setting new high
* USDA cuts FSU wheat production, but less than expected (Adds CFTC data, rewrites first paragraph)
By K.T. Arasu
CHICAGO, Aug 10 (Reuters) - Corn futures fell nearly 2 percent on Friday as the U.S. government scaled back demand after the worst drought in 56 years drove prices to record peaks, but the market set an all-time high earlier in the Chicago trading session.
Despite the 1.8 percent drop on the day, benchmark December corn futures at the Chicago Board of Trade rose for the second straight week and are up 60 percent since mid-June.
After corn rose to an all-time high of $8.49 per bushel early on Friday, traders said the market will likely to go through bouts of profit-taking but could find support if yields from the early harvest in the Midwest comes in below expectations.
The U.S. Department of Agriculture, in its first survey-based report detailing damage from the drought, cut corn production in the United States by 17 percent and domestic and export demand by 12 percent.
Demand for corn by the domestic livestock and ethanol sectors and to be exported was dropped by a combined 1.4 billion bushels. The USDA cut corn imports by China from all global sources by 60 percent to 2 million tonnes.
Weekly data from the Commodity Futures Trading Commission on Friday showed that large speculators, including hedge funds, cut their bullish bets in soybean futures and options last week, but raised their net-long positions in corn.
November soybean futures closed 0.8 percent higher after the USDA aggressively cut the U.S. crop yield. It also forecast strong demand despite prices soaring 25 percent since mid-June. Futures are up for a second straight week.
Chicago September wheat closed 3.0 percent lower as the USDA raised its estimates for U.S. production and ending stocks while keeping exports unchanged. Prices fell for the third straight week but are up 45 percent since mid-June.
On Friday, wheat was also pressured by smaller-than-expected cuts in global wheat production, especially in Russia, despite inclement weather dimming eastern Europe crop prospects.
"The global figures were more bearish (than U.S. figures). They did not cut production as much as expected, especially in Russia," said grains analyst Dan Manternach of Doane Agricultural Services in St Louis, Missouri.
USDA cut wheat production in the former Soviet Union states by 5.6 million tonnes to 82.96 million, and dropped Russian output by 6 million tonnes to 43 million.
There have been persistent rumors that Russia could curb exports to preserve supplies, as it did in 2010 when its crops were devastated by a drought, which rallied 2010 prices.
The USDA report had been widely expected to reduce the size of U.S. corn and soybeans while rationing demand. When that was confirmed on Friday, there was profit-taking in corn and wheat futures.
After weeks of corn being in the driver's seat, some analysts feel the focus will shift to soybeans, due in part to the stocks-to-use ratio, a measure of demand, being the smallest in 48 years in the 2012/13 (September/August) season.
CBOT December corn fell 1.8 percent to $8.09-1/4 per bushel after setting an all-time high of $8.49.
New-crop November soybeans rose 0.8 percent to $16.43-3/4 per bushel. CBOT September wheat was down 3.0 percent at $8.85-1/4 a bushel.
In Europe, November milling wheat in Paris fell 0.6 percent to 264.00 euros a tonne.
"The demand side of the market is very bullish. Chinese demand has not backed off and stocks are low in Brazil," said grains analyst Ken Smithmier of The High Tower report.
In a separate report, the USDA confirmed on Friday that China bought 290,000 tonnes of U.S. soybeans for shipment in the marketing year beginning September.
"Did we feed the bull? I don't think we did, for the corn," said grains analyst Mike Zuzolo of Global Commodity Analytics.
"USDA cut the corn yield more drastically than the trade was guessing, as far as the average trade guess. But they took total demand down and they added to old crop stocks. So I would give the corn a neutral report," he added.
The USDA pegged the U.S. corn yield at 123.4 bushels per acre, below the average trade estimate of 127.3 bushels and down from its July estimate of 146 bushels. The department has now slashed the corn yield by a total 42.6 bushels in two months.
The aggressive stance reflected the severity of the damage from the drought that is centered in the U.S. Midwest farm belt, which grows 75 percent of the country's corn and soy crops that are used for food, feed and biofuels.
U.S. corn production this year was cut to 10.779 billion bushels, below trade estimates for 11.026 billion. The soy crop was pegged at 2.692 billion bushels, below estimates for 2.817 billion. The department pegged the soybean yield at 36.1 bushels per acre, below expectations for 37.8 bushels. (Reporting by Editing by Gus Trompiz in Paris and Colin Packham in Sydney; Editing by Alison Birrane, Marguerita Choy, John Wallace, M.D. Golan and Bob Burgdorfer)