U.S. corn surged 5 percent o n T hursday to its highest price in over a year and soybeans jumped to within sight of their record high as new forecasts offered no sign of rain relief for withering crops.

With fields now at the mercy of what may be the worst Midwest drought in nearly a quarter century, grain traders ignored the potentially bearish influence of a rising U.S. dollar and focused on growing signs that one of the biggest corn crops ever planted by U.S. farmers is now shrinking by the day. Corn prices have surged by nearly 30 percent over the past two weeks, dragging wheat and soybean prices up with them and threatening to kick off another bout of food-inflation fears. Only a few times before have prices risen so far, so fast - once was in 1988, the last time the U.S. heartland faced such a dire drought.

New forecasts showed that a spell of blistering triple-digit heat should ease by the weekend but showed no signs of rain in the near term for key states like Iowa and Illinois. Weather models released at midday turned hotter and drier for next week, igniting a further buying spree.

With more acres of corn now entering the key phase of pollination, the time when yields are set, every hot, dry day reduces output.

"The general theme is going to be that the hottest weather is in the very near term but the rains still will be slow to pick up here over the next couple of weeks," said Joel Widenor, a meteorologist with Commodity Weather Group.

Chicago Board of Trade December corn surged 34 U.S. cents, or 5 percent, to $7.08-1/2 a bushel, as U.S. grain markets resumed trading after being closed Wednesday for the U.S. Independence Day holiday.

The new-crop contract earlier notched a fresh contract high of $7.13.

September corn briefly hit its daily trading limit of a 40-cent gain, while front-month corn hit its highest level since last June on a continuous chart.

In Indiana, the fifth-largest corn-growing state, much of the damage from the worst drought since 1988 is irreversible, said Purdue University corn specialist Bob Nielsen.

"A break in the drought and heat for the remainder of the season would certainly minimize further deterioration of the corn crop but would not result in recovery to anywhere close to normal yields," he said.

Soybean prices joined the rally over the past week, blasting to their highest since a 2008 record as traders fear the 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. The most active Chicago November soybean contract spiked up 51-3/4 cents, or 3.5 percent, to $15.26-1/2 per bushel, touching a contract high of $15.29 a bushel. The spot July month reached $16.44-1/2, within 18-1/2 cents of its July 2008 record $16.63.

Robust export demand for U.S. soybeans, due to drought damage earlier this year to South America's crops, is driving the oilseed higher with thoughts that yield reductions could trim U.S. supplies, said Karl Setzer, analyst at MaxYield Co-operative in Iowa.

"We can't afford to lose one bushel of production." An unidentified importer bought nearly 1.2 million tonnes of U.S. soybeans in a single deal last week.

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. Commodity Weather Group on Thursday said it estimated the U.S. 2012 corn yield at 152.2 bushels per acre.

"We will see (higher prices) until the forecasts change," said Setzer. "Thing is, how much damage has been done between now and then?"

As the U.S. drought worsens and prices climb, corn buyers in Asia, who account for just less than half of the world's imports, have been caught short.

Hot and dry weather in Ukraine has reduced that country's corn yield, prompting its state weather forecasting center to lower its harvest outlook. The trade 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, Setzer said.

Chicago September wheat jumped 38-3/4 cents, or 4.9 percent, to $8.38 a bushel, gaining spillover support from corn.