Hot, dry conditions plagued major crop growing regions of Argentina and Brazil over the past two months, igniting a rally in Chicago’s grain markets and posing the threat of further shrinkage in global corn supplies after the U.S. harvest fell short of expectations.

As dry weather persisted through the holidays, analysts including Dan Basse downsized expectations for South America’s crops. Basse, who’s president of AgResource Co. in Chicago, recently cut his projection for Argentina’s corn harvest by 23 percent, to 23 million metric tons. His figure is also 21 percent below the U.S. Department of Agriculture’s forecast.

South American weather "is increasingly concerning to the market,” Basse said in a Jan. 3 e-mail.

Those concerns intensified in recent weeks, contributing to an upswing in Chicago futures prices that sent the corn market up 14 percent from nine-month lows reached Dec. 15. On Jan. 3, the first trading day of 2012, corn futures for March delivery rose 12 cents to $6.58 ½ a bushel, an eight-week high.

Argentina, the world’s No. 2 corn exporter after the U.S., was expected to harvest a record crop this year, according to the USDA. Strong South American harvests this year are crucial to replenishing global grain stockpiles after unfavorable weather last year hampered crops in the U.S., the world’s top corn and soybean producer.

But continued weather problems in South America probably will push grain prices even higher as global buyers to seek more supplies from the U.S., analysts say. That would further squeeze livestock and dairy producers already pinched by soaring feed costs after corn touched an all-time high near $8 a bushel last year.

Soybean futures have also rallied in part because of South America’s weather. On Jan. 3, March soybean futures surged 19 ¾ cents to $12.27 ½ a bushel, up 11 percent from a mid-December low.

According to meteorologist Joel Widenor of Commodity Weather Group, LLC, there are “serious moisture deficits” across about three-quarters of Argentina’s corn and soybean belt.

If current weather pattern persists over the next two weeks, March corn futures could reach $6.80 and March soybeans may hit $12.90, Archer Financial Services analyst Scott Harms said, though further gains would hinge on USDA reports later this month and actual evidence of significant yield losses in South America.

“I don’t think that there is any question that there is a growing concern regarding the crops in S. America,” Harms said in an e-mail. “There is little doubt that the current growing conditions in southern Brazil and especially Argentina are not conducive for crop development as we enter the crops’ reproductive period.”

Similar to the situation with Argentina’s producers, Midwest corn farmers were hit with a damaging July heat wave that coincided with their crop’s critical pollination phase. In Argentina, the growing season is currently at the equivalent to the beginning of July in the U.S., Harms said. Argentina has received less than 50 percent of its normal rainfall, he said.

“At this point, large-scale production reductions have not occurred,” Harms said in a report last week. “However, the weather during the month of January will be critical to South American corn production.”

Another analyst, Michael Cordonnier of Soybean & Corn Advisor, Inc., also recently trimmed his outlook for South America’s crops. Cordonnier, who is based in Hinsdale, Ill., lowered his Argentina corn harvest estimate by 2 million metric tons, to 25 million metric tons, citing adverse weather.

The USDA may follow suit with cuts to its own estimates for Argentina and Brazil production, some analysts say.

In its monthly Supply and Demand report in December, the USDA predicted Argentina would harvest a corn crop of 29 million metric tons, or 1.14 billion bushels, up 29 percent from the previous year and an all-time high. Last year’s U.S. harvest totaled about 312.7 million metric tons, or 12.31 billion bushels.

The USDA is scheduled to release its next Supply and Demand updates Jan. 12.

South America’s crops still have time to recover from dry conditions if timely rains arrive this month, some noted. Argentina’s corn and soybean crops are typically planted in October and November and harvested in March and April.

Lack of rainfall hurt early-planted crops in some areas of Argentina, reducing potential yields, Buenos Aires Grain Exchange said in a Dec. 29 report. However, the later-seeded crops “have more chances to recover from their present water stress, achieving yields which could offset those of the early crops,” the exchange said.