U.S. wheat futures rallied over 2 percent on Monday as corn and soy rose over 1 percent on a wave of technical short-covering before the release of a monthly U.S. government supply/demand report.

"It's short-covering. We're oversold and they're evening up before the report tomorrow. There's little else in here," said veteran cash and futures merchant Paul Haugens, a vice president for Newedge USA.

Analysts expect the U.S. Agriculture Department (USDA) on Tuesday to lower its outlook U.S. corn and soybean stocks but not by enough to significantly eat into a supply surplus. The report is also likely to show record large soybean crops in Brazil and Argentina.

USDA said it will issue the report on Tuesday despite a major snowstorm on the East Coast.

Managed funds or trading funds have been selling grains short since early January and increased their selling following the release of a USDA report early last month that showed building stockpiles of wheat, corn and soybeans, a bearish market factor.

"There is some thinking that following all of the selling over the last month that in the short term we've hit a bottom," said Vic Lespinasse, analyst for GrainAnalyst.com.

The weekly Commodity Futures Trading Commission (CFTC) commitments of traders report released Friday showed large speculators known as noncommercials or managed/trading funds added to their short positions in the wheat, corn and soybean markets during the week ended Feb. 2.

The managed funds, minus the index funds, are extremely short in wheat, approaching levels last seen in September.

"They have been playing the short side for quite some time. The short positions are large, which indicates they will probably be net short for quite some time," said Shawn McCambridge, analyst for Prudential Bache Commodities.

The CFTC said funds were net short 66,355 lots of wheat futures, up 5,472 from a week earlier. They also were net short in soybeans for the second week in a row and for the first time since 2006.

U.S. soy for March delivery was up 16 cents per bushel at $9.29-1/2, March corn was up 4-1/2 cents at $3.56 and wheat for March was up 10-3/4 cents at $4.84.

Grains also drew some support from a steadying in broader markets after a sharp pullback.

The dollar eased and oil steadied above $71 a barrel as last week's slide tempted bargain hunters, but European shares gave up their gains as worries persisted over euro zone sovereign debt.

"The grain markets were sold off very heavily as a result of the dollar strength and poor fundamentals, but you have got to have a little bit of pause at some stage," said Scott Briggs, agricultural commodity strategist at ANZ in Melbourne.

Before Monday's rally, corn had lost 14 percent since the beginning of this year, while soybeans and wheat had fallen by more than 11 percent in a decline triggered partly by bearish crop estimates from the USDA last month. CBOT settlement prices

fromforexyard.com