CHICAGO (Dow Jones)--U.S. corn futures settled higher Thursday, underpinned by worries dryness may reduce production prospects in Argentina. CBOT corn for March delivery, the most-active contract, rose 3 1/4 cents, or 0.6%, to $5.87 1/2 a bushel.

Corn futures are trading near five-week highs on worries global supplies will tighten if Argentina's crop falls short of expectations.

Weather is very important for Argentina corn, as the crop is entering a crucial development period called pollination, said Tim Hannagan, analyst with PFG Best, a brokerage firm in Chicago.

Argentina is the world's second largest exporter of corn after the U.S.

China has been negotiating with Argentina for future corn purchases next year, and the threat of a drought raises the likelihood of the U.S. having to fulfill any short falls in production, Hannagan said.

The market added some premium, bracing for potential problems in Argentina that could entice China to front load purchases in an effort to avoid any tight balances in supply and demand in 2011.

However, advances were tempered by end of year profit taking, as traders want to take some profits off the table ahead of the holidays, Hannagan said. Buyers have been nibbling at the top of rallies, but its hard to attract additional buying when participants want to book profits before the end of the year, he added.

Futures prices reached a 27-month high in November when the U.S. government cut its harvest estimate for the third time.

Traders have been waiting for China to make significant purchases, as export demand has been lackluster lately. Total weekly U.S. corn export sales, issued Thursday for the week ended Dec. 9, were 880,100 tons, within analysts' expectations of 600,000 to 1.1 million.

The T-storm Weather LLC forecast said dry and hot weather will continue through tomorrow in Argentina. A cool front will trigger some heavy thunderstorms in northern areas. Therefore, more soybeans than corn will benefit from upcoming rainfall because sharply drier weather continues in the corn states of Buenos Aires and La Pampa, T-storm forecasts.

Next week, a heat wave envelops Argentina as maximums frequently reach well into the 90s Fahrenheit, with localized 100s F occurring in key corn areas as well, T-storm added.

CBOT oat futures settled higher, continuing to garner support from outlooks for tight U.S. and Canadian balances between supply and demand. Futures traded in both positive and negative territory, as end of year profit taking applied pressure, analysts said. March oats settled 2 cents or 0.5% higher at $3.85 1/2.

Ethanol futures finished higher, supported by strong demand amid optimistic outlooks for an extension of U.S. ethanol tax credits. January ethanol ended $0.011 or 0.5% higher at $2.187 a gallon.

-By Andrew Johnson Jr., Dow Jones Newswires; (312) 347-4604;