* Nearby corn, soy set lowest prices since November 2020

* US grain exports face competition from South America

* Commodity funds expanded short position in CBOT corn

CHICAGO, Feb 26 (Reuters) - Corn and soybean futures fell to new three-year lows in front-month contracts at the Chicago Board of Trade on Monday under pressure from plentiful world supplies, heaping more pain on U.S. farmers.

Nearby corn futures remained under $4 per bushel after sinking below that level on Friday for the first time since November 2020. The front-month contract has tumbled about 16% this year and is down 38% from a year ago, after record harvests in the United States and Brazil.

U.S. farmers, who are holding large inventories of corn in storage from last year's harvest, regret they did not sell more when prices were higher.

They face limited domestic demand for corn to feed livestock after ranchers reduced the U.S. cattle herd to its smallest level in decades. The United States also faces competition for export sales from South American suppliers.

"We don't have a reason to rally," said Rich Nelson, chief strategist for brokerage Allendale.

Nearby March corn was down 2-1/2 cents at $3.97-1/4 a bushel by 10:45 a.m. CST (1645 GMT) after sliding earlier to $3.94-1/2. The most-active May contract was down 1 cent at $4.12-1/2.

Front-month March soybeans dropped 7-1/4 cents to $11.25-3/4 a bushel, while most-active May soybeans lost 6-3/4 cents to $11.35. Wheat was also weaker, with the most-active May contract down 3/4 cent at $5.68-1/4 a bushel.

Short covering by commodity funds could boost corn and soy futures, though funds have been making money on bets that prices will fall, analysts said. In the week ended Feb. 20, money managers increased their net short position in CBOT corn futures and options to a record 340,732 contracts from 314,341 a week earlier.

Unfavorable U.S. weather and disruptions to spring plantings could trigger a potential rally, Nelson said.

"We can argue there's dryness for Iowa and parts of Nebraska. We can argue the summer weather outlook for the Plains might be a bit dry," he said. "Those are valid issues. It's probably not time to trade those yet."

(Reporting by Tom Polansek in Chicago. Additional reporting by Michael Hogan in Hamburg and Naveen Thukral in Singapore; EditEditing by Marguerita Choy and Kirsten Donovan)