(Reuters) - Benchmark U.S. corn prices hit a contract high Monday, while wheat rallied more than two percent and soybeans raced to their highest in a week, as the worst drought in five decades ate further into crop yields across the U.S. grain belt - once again fanning food inflation fears. Agricultural markets have picked up steam since Friday as reports of crop damage poured in, with profit-taking based on previous forecasts of rain and wider macro-economic concerns seen as largely overdone. " We hadn't seen much of a shift in the overall fundamentals, people got a little bit overexcited about the (U.S.) rainfall. It's still very dry and forecasts are for above-average temperatures and below-average rainfall," said Erin FitzPatrick, commodity analyst with Rabobank in London. Chicago Board of Trade new-crop December corn rose 2.52 percent to $8.13-1/4 a bushel by 0908 GMT, after touching a contract high of $8.14-1/2 a bushel. Actively traded November soy gained 1.87 percent to $16.31-3/4 after touching $16.37-3/4 a bushel, the highest since July 23. September wheat added 2.09 percent to $9.16-3/4 a bushel. "The market fears that the severest drought to affect the U.S. for decades may worsen and could damage the crop far more seriously than previously predicted by the U.S. Department of Agriculture (USDA)," Commerzbank said in note to clients. "No correction is likely for as long as reports of drought keep coming in," the bank added. Further fuel for the rally could come from the U.S. Department of Agriculture's weekly crop progress report later on Monday, which analysts expect will show a marginal downgrade in the corn and soybean crops. There were expectations for the USDA report to show the soybean crop in good-to-excellent condition to fall 1 to 2 percentage points from the previous week's 31 percent. Ratings have dropped four straight weeks as the drought intensified. The corn crop, along with soybeans, is rated to be in the worst condition at this time of the year in nearly 25 years due to the onslaught from the drought. Traders will also be watching how much of the demand for corn has been dented by the surge in prices, particularly from the ethanol sector where production has begun to decline. BLACK SEA CONCERNS The wheat market has been largely driven by the rally in corn futures but there are growing concerns over supplies from the Black Sea region and South America. "There is no weather relief this week as there are no rains in central and southeastern corn belt until the weekend and temperatures will remain above average," said Victor Thianpiriya, agricultural commodity strategist at ANZ. "The market needs to ration demand." In Paris, the benchmark November milling wheat was up 5 euros or 2.13 percent at 263.25 euros a tonne on Monday."We're building on Friday's rebound, supported by funds buying back positions in Chicago," a French dealer said. "There is the prospect of a further deterioration in U.S. crop ratings later today." Soybeans, along with corn and wheat, posted their first weekly decline last week since the worst drought in 56 years started boosting prices about a month and a half ago, spurring corn and soybean futures to record highs. The U.S. drought has left corn plants withered and dying, and crop yields in the largest producing states will be much lower than experts have forecast, scouts said on Friday as they completed a U.S. Midwest crop tour. Crop forecasters Lanworth, a unit of Thomson Reuters, and Informa slashed their yield estimates for both corn and soybeans on Friday, illustrating the effects of the drought.More than half of the contiguous United States is experiencing drought, which is centred in the Midwest that produces 75 percent of the corn and soybeans in the world's largest grain exporting nation. While soybeans are in their crucial yield-determining phase, the bulk of the corn crop is past the phase of pollination with rain at this stage of development unlikely to make much difference. Dry weather in some wheat-growing areas in Argentina has begun to affect the 2012/13 crop, which farmers have yet to finish planting, the farm ministry said on Friday in its weekly crop progress report. The country is the world's No. 6 wheat exporter and the top supplier to neighbouring Brazil. The government expects farmers to seed 3.8 million hectares with the grain this season, down from 4.6 million hectares last season. * Prices as of 0907 GMT Product Last Change Pct Move End 2011 Ytd Pct Paris wheat 264.00 6.75 +2.62 195.25 35.21 London wheat 194.50 6.80 +3.62 153.65 26.59 Paris maize 263.00 3.00 +1.15 197.25 33.33 Paris rape 496.75 9.00 +1.85 421.50 17.85 CBOT wheat 916.25 18.25 +2.03 671.25 36.50 CBOT corn 818.75 20.25 +2.54 654.75 25.05 CBOT soybeans 1711.75 27.50 +1.63 1207.75 41.73 Crude oil 90.12 -0.01 -0.01 98.83 -8.81 Euro/dlr 1.23 0.02 +1.27 1.30 -5.30 * All grain and oilseed prices for second position. Paris futures prices in Euros per tonne, London wheat in pounds per tonne and CBOT in cents per bushel. (Additional reporting by Valerie Parent and Gus Trompiz in Paris and Veronica Brown in London; editing by James Jukwey)
