Corn futures tumbled on Wednesday o n profit-taking and a s updated forecasts called for rain in the drought-parched eastern Midwest, erasing gains of nearly 3 percent earlier.

Soybeans fell as corn spiralled lower, both shrugging off early gains from bullish government estimates for a lower-than-anticipated U.S. crop and tighter stocks. But both settled above session lows as dry weather remained a concern for crops already damaged by the worst drought in a quarter century.

Wheat was also dragged from early peaks, but settled modestly higher as corn pared losses near the close and as adverse weather dragged down crop output in some key world suppliers, including Russia and Ukraine.

"The latest idea from GFS is for amounts of 0.5 to 1 inch (of rain), widespread, with some inch-plus amounts scattered in as well," said John Dee of Global Weather Monitoring, referring to the U.S. weather model.

"We are still looking for some rains to develop in southeast Midwest, and maybe even in the far northern Midwest. But some of the most critical areas, Iowa and the northern two-thirds of Illinois, are not going to see too much in the next five days, other than some spotty stuff," h e said.

December corn on the Chicago Board of Trade fell 1 3-1/2 cents, or 1.9 percent, to $7 .04 a bushel after earlier peaking at a contract high of $7.48. Spot July fell 10-1/4 cents, or 1.4 percent, to $7.50-3/4, a s traders pocketed profits after the market's recent run to 13-month highs.

The historic rally had lifted prices more than 40 percent in three weeks as the worst drought in 24 years wilted crops. The drought prompted the U.S. Agriculture Department on Wednesday to slash its production estimate by a whopping 20 bushels per acre to 146 bushels per acre in a monthly report.

Production may decline even further as dry weather continues to plague vast areas of the Corn Belt, where the majority of the corn was pollinating, a key growth phase when cobs sprout grain and adequate moisture is essential.

Although forecasts suggested wetter weather in parts of the U.S. Midwest this week, about half of the region is still in a significant moisture deficit.

"If they can drop it down 20 bushels an acre without going into the field, then it must be really bad out there. We can expect to see additional reductions once they go into the fields and start doing the measurements," said Shawn McCambridge, analyst with Jefferies Bache.

But as shrinking supply prospects drove prices to near 13-month highs, demand has also taken a hit as USDA cut estimates for corn use by ethanol makers, livestock producers and exporters nearly as much as it cut supplies.

The historically high prices would cut into margins at meat companies like Smithfield Foods Inc, Tyson Foods and others, crimp profits at ethanol producers and possibly lead to higher food inflation in the United States and abroad.

"The USDA cut total supply just like they did in July of 1988 but they also cut total demand almost as aggressively," said Mike Zuzolo, president of Global Commodity Analytics, pointing to the severe drought year to which many are comparing the current drought.

"Even if we have that lower yield, we are losing demand. The export market would suggest that and the ethanol numbers today would as well," he said.

The U.S. Energy Information Administration said Wednesday that weekly ethanol output fell for a fourth straight week last week to the lowest in nearly two years.

Soybeans retreated as corn turned lower and extended declines amid rainier weather forecasts.

Prices had been up more than 1 percent near record peaks reached on Monday as the USDA lowered its view of that crop and projected global supplies would remain historically tight well into next year.

New-crop CBOT November soybeans fell 16 cents, or 1 percent, to $15.22-1/2 a bushel a fter hitting a contract high of $1 5.75. Front-month July soybeans were 25-3/4 cents lower at $16.23 after climbing to a rec ord high of $16.79-1/2 a bushel on Monday.

Wheat shed earlier support stemming from weather-reduced production in several key exporting countries, pressured by sinking corn. CBOT September wheat added 5 cents, or 0.6 percent, and settled at $8.26-1/4 a bushel.