A.A.
First, I would stop telling the child he is too young to think about this. He doesn't have a lot of choice in that, whether by natural development curiosity, or exposure. Some children are sensitive enough to that sort of a response that they turn inward on themselves with negativity and shame for then thinking it.
Second, I would personally be fairly frank with him, while emphasizing empathy for other people. When he talks about biting someone else's off, ask him how he would feel if someone did that to him? Don't you think that would hurt?
Lead him with questions and wait for his answers while he thinks it through. You get what you want, which is less deviance in the long run, an d he gets what he needs which is the chance to talk through his thoughts whether they came from a dream or not.
Question him toward empathy any time you can for a while about any subject where it applies.
That he's thinking about sex isn't so much a problem. That he's not thinking about the other person's feelings and boundaries and limits is. So teach him that by asking him "How do you think that would make them feel" sorts of questions and helping him think through his responses when he gets stuck or explain why when he needs that.