* Soybean futures fail to hold an overnight rally
* Grains dip during a choppy session
* S.American weather, upcoming USDA report are factors
CHICAGO, March 21 (Reuters) - Chicago Board of Trade (CBOT) soybean futures shot to a two-month high on Thursday as worries about threatening weather in Argentina triggered speculative buying and short-covering, analysts said, but the market turned lower after the rally spurred a round of farmer sales.
Corn and wheat futures also retreated from early strength.
As of 12:12 p.m. CDT (1712 GMT), CBOT May soybeans were down 1/4 cent at $12.09-1/4 a bushel after rising to $12.26-3/4, the highest on a continuous chart of the most-active contract since Jan. 26.
CBOT May corn was down 3/4 cent at $4.38-1/4 a bushel and May wheat was down 2-1/2 cents at $5.42-1/2 a bushel.
Soybeans tumbled as producers in the United States and South America sold supplies, seizing on the jump in prices.
"We are seeing an influx in farmer selling," said Tom Fritz, a partner at EFG Group in Chicago, adding that producers were selling soybeans as well as other crops.
News of damaging rain and hail over key grain-producing regions in Argentina late on Wednesday helped buoy soybean futures. But forecasts called for drier weather over the next week.
"It will nick the production, but the extent of the damage is still yet to be seen," Michael Cordonnier, owner of Soybean and Corn Advisory, said.
Traders continue to adjust their positions ahead of the U.S. March 28 Prospective Plantings and quarterly stocks reports, which have a history of jolting markets.
Large global grain supplies at cheap prices continue to weigh on the competitiveness of U.S. grains. Funds hold sizable net short positions in soybean, corn and wheat futures, priming markets for bouts of short-covering. (Reporting by Heather Schlitz in Chicago Additional reporting by Naveen Thukral in Singapore and Sybille de La Hamaide in Paris Editing by Matthew Lewis)
