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 grains exporter, but the market pared gains as global demand was also scaled back after a drought drove prices to record peaks.

Soybean futures at the Chicago Board of Trade rose, but did not match overnight peaks, after the U.S. Department of Agriculture aggressively cut the U.S. crop yield by more than had been expected by analysts polled by Reuters.

Chicago wheat tumbled as the USDA raised its estimates of U.S. supplies and despite cutting production in former Soviet Union states where crop prospects were being dimmed by inclement weather as investors took profits from recent gains.

The first survey-based report from the USDA that accounted for damage from the worst drought in 56 years in the United States had been widely anticipated to reduce the size of U.S. corn and soybeans while rationing demand.

"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 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.

While cutting back U.S. corn production sharply, the USDA also adjusted the demand side of the equation lower. In particular, it dropped Chinese demand for corn from 5 million tonnes to a mere 2 million.

China, once a net exporter of corn, has turned into an importer and emerged as a major market for the United States, which is also the top supplier of soybeans to the country.

CBOT December corn rose 0.2 percent to $8.25-1/4 per bushel after setting an all-time high of $8.49 a bushel.

New-crop November soybeans rose 1.6 percent to $16.57 per bushel. CBOT September wheat was down 1.6 percent at $8.98-3/4 a bushel.

In Europe, November milling wheat in Paris fell 0.4 percent to 264.25 euros a tonne. (Reporting by Editing by Gus Trompiz in Paris and Colin Packham in Sydney; Editing by Alison Birrane)