* 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) -

U.S. corn and soybean futures bounced on short-covering on Monday, after large supplies earlier knocked nearby contracts to their lowest levels in more than three years, traders said.

Front-month Chicago Board of Trade corn recovered to settle above $4 per bushel, a benchmark level the market breached on Friday for the first time since November 2020. The nearby contract has tumbled about 14% this year and is down 37% from a year ago, after record U.S. and Brazilian harvests.

U.S. farmers must grapple with large corn inventories from last year's harvest and with limited demand for feed from livestock producers, who reduced the nation's cattle herd to its smallest level in seven decades. The United States also faces stiff competition for global grain and soy export sales.

The corn market remains vulnerable to bouts of short-covering by speculators, though, analysts said. Money managers

increased their net short position

in CBOT futures and options to a record 340,732 contracts in the week ended Feb. 20.

"Today's trade was speculative and technical, with corn shorts at a record as of nearly a week ago and outside commodity markets trading higher," said Terry Reilly, senior agricultural strategist for Marex.

CBOT March corn ended up 7-1/4 cents at $4.07 a bushel, after falling to a contract low of $3.94-1/2. March soybeans rebounded from a contract low of $11.24-3/4 per bushel to end up 3 cents at $11.36.

Wheat also closed higher, with CBOT March futures rising 3-3/4 cents to $5.77-1/4 per bushel.

Market participants adjusted positions ahead of first notice day for March futures on Thursday, brokers said.

Traders will watch for unfavorable U.S. weather and potential disruptions to spring plantings as factors that could trigger further short covering in the coming weeks.

"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," said Rich Nelson, chief strategist for brokerage Allendale. "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; Editing by Marguerita Choy and Kirsten Donovan)