U.S. corn futures extended their rally Friday, closing above $7 per bushel for the first time since July 2008 amid dwindling supplies and news that Mexico's crop has been damaged by a freeze.

Corn for March delivery at the Chicago Board of Trade ended up 1.1% to $7.06 1/2, only the 19th time in history corn has closed above $7.

Traders were expecting the market to pull back following a surge this week on a Wednesday government report. Instead, reports that a freeze in Mexico has destroyed more than 4 million metric tons of corn set off fresh fears about supplies.

"That is what absorbed the end-of-week profit-taking that sought to suppress corn prices," says John Kleist, senior analyst with e-BOT Trading.

Traders and analysts say the market could be headed toward its all-time record of $7.65, set during the historic rally of 2008. The reason is that corn supplies as a percentage of usage are expected to dip to a modern-day low last seen 15 years ago, according to the U.S. Department of Agriculture.

Surging ethanol demand, along with disappointing crops in the U.S. and elsewhere, are among the reasons supplies have dwindled.

Kleist said the impact of the crop losses in Mexico could be minimized through replanting. But market participants will remain very reluctant to sell, analysts said, for fear that prices will climb yet higher.

The high prices have prompted increasing criticism of the ethanol industry, which uses about 40% of the crop. Analysts said that because of the federal Renewable Fuels Mandate, ethanol demand has not been responding to higher prices.

"The USDA is throwing the livestock industry under the bus," Kleist said.

The ethanol industry rejects the charge, and points out that corn used for ethanol also produces distillers dried grains, a byproduct that is used for livestock feed around the world.

Looking ahead, the USDA will release long-range projections out to 2020 on Monday. While the report usually garners little attention, this year is likely to be different because of the heightened concern about a global food crisis, analysts said.