Corn futures set an all-time high on Friday as the U.S. government slashed the size of the crop in the world's top grain exporter, but the market closed lower as demand was scaled back after a drought drove prices to record peaks.

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 with the worst drought in 56 years devastating the crop.

After rising to an all-time high of $8.49 per bushel on Friday, traders said the market was 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 were 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.

November soybean futures ended 0.8 percent higher after the USDA aggressively cut the U.S. crop yield, and as demand remained strong despite prices soaring 25 percent since mid-June. Prices were up for a second straight week.

Chicago September wheat closed 3.0 percent lower as the USDA raised its estimates of 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 hurt by smaller-than-expected cuts in global wheat production, especially in Russia, despite inclement weather dimming crop prospects in eastern Europe.

"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 when its crops were devastated by a drought in 2010, which rallied prices.

The USDA report had been widely expected to reduce the size of U.S. corn and soybeans while rationing demand, leading to 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 0.7 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.

SOYBEANS BULLED-UP

"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 bushel 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 and M.D. Golan)