WINNIPEG, Manitoba/CHICAGO, July 5 (Reuters) - 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.

David Fuller's view This is serious as I discussed in my commodity review on Tuesday and daily in Audios over the last two weeks. You can see the problem in the price surges for corn (daily & weekly) and soybeans (daily & weekly). Wheat (daily & weekly) has been less affected but prices have also risen sharply.

The USDA had been forecasting a record corn crop until recently, and it might have been if everything had gone well, which it so very clearly has not. Instead of a surplus we will probably see a deficit for this staple food, subject to crop yields in other countries. The US is the world's largest exporter of corn but with ethanol production taking an increasing portion of the annual crop, by law, importers in Asia and elsewhere will have difficulty in securing adequate supplies, and they will be paying much higher prices than anticipated only a month ago.

Since most corn is used to feed livestock, the knock-on effect in terms of food prices is likely to be considerable, later this year and for at least the first nine months of 2013. Unfortunately, we could see more food riots in some developing countries next year.

In a weather induced move of this type it is very difficult to predict where it will stop, as I mentioned on Tuesday. However, we know that accelerations of this magnitude are not sustainable beyond the short term. Eventual downward dynamics will provide the first evidence of waning demand relative to profit taking for these three agricultural commodities but it is not uncommon to see a loss of uptrend consistency at penultimate tops, with the markets correcting briefly before resuming their uptrends. This is particularly likely when a significant fundamental change such as crop damage due to the US heatwave is occurring.

The latest that I have seen on weather forecasts for the Midwest is that temperatures will decline somewhat during the weekend but that little moisture is currently forecast for next week. Rain, when clearly predictable, will certainly trigger some profit taking and reassessment of crop prospects following the current heatwave damage.