UPDATE 1-U.S. lifts forecasts for corn, soybean harvests

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CHICAGO, Sept 10 (Reuters) - The U.S. government lifted its forecast for the country’s corn harvest by 1.7% on Friday after farmers devoted more acres to the grain than previously reported.

The domestic soybean production outlook also was raised after some timely rains in August - a critical development month for the oilseed - raised expectations of record yields in key production areas east of the Mississippi River.

Traders have been closely monitoring U.S. crop development as a bumper harvest would help to ease fears of global food inflation after crop shortfalls in Brazil and other parts of the world.

Chicago Board of Trade soybean futures, which had been trading close to unchanged before the forecasts came out, rallied to session highs after the data was released. Corn futures quickly sank to their lowest since Jan. 25, dropping below the $5 a bushel threshold, but recovered most of their losses as the market digested the news.

“We went into this report very oversold and the market was already fearful of bigger acres and bigger yield and bigger ending stocks,” said Don Roose, president of U.S. Commodities in West Des Moines, Iowa. “That was all dialed in.”

U.S. corn production will reach 14.996 billion bushels, which would be the second biggest harvest ever. The harvest forecast was based on an average yield of 176.3 bushels per acre, according to the U.S. Agriculture Department’s monthly World Agricultural Supply and Demand Estimates report. Planted corn acreage was increased to 105.6 million from 104.1 million.

Soybean production was seen at 4.374 billion bushels on an average yield of 50.6. If realized, the soybean crop would be the third biggest ever and yields would tie for the second highest.

In August, the USDA forecast corn production of 14.750 billion bushels and soybean production of 4.339 billion. Yields were seen at 174.6 and 50.0, respectively.

Analysts had been expecting corn production to be pegged at 14.942 billion bushels and soybean production at 4.377 billion bushels, based on the average of estimates in a Reuters poll. (Additional reporting by Karl Plume; Editing by Susan Fenton)