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Texas Cotton Farmers Abandon Record Acres on Drought as Gap’s Costs Rise

By Debarati Roy
June 30, 2011 10:18 AM EDT

Cotton farmers in Texas, the biggest U.S. growers, may abandon a record number of acres after the worst drought in at least a century damaged plants and boosted costs for textile makers including Gap Inc.

“This year will probably rank among the top abandonments,” said John Robinson, a professor and extension economist at Texas A&M University in College Station. “The situation looks very grave.”

About 55 percent of the Texas cotton fields were in poor or very poor condition on June 26, matching the record low in 2006, the U.S. Department of Agriculture said. More than 70 percent of the state was experiencing “exceptional” drought as of June 21, and non-irrigated crops in the Panhandle and South Plains regions have all failed, a Texas A&M research unit said.

While the U.S. Midwest got too much rain this spring, flooding millions of acres of corn, soybean and rice fields, the dry conditions in Texas -- the worst since record-keeping began 116 years ago -- may force farmers to make crop-insurance claims rather than harvest cotton.

Abandonment in the High Plains region, which usually produces about two-thirds of the state’s cotton, may reach 50 percent, the highest since 53 percent of the crop was left to rot in 1992, according to Lubbock, Texas-based Plains Cotton Growers Inc. The record is 42 percent in 1998, according to the USDA.

Gap Cuts Forecast

Cotton futures in New York as much as doubled in the past year, touching a record $2.197 a pound on March 7, as adverse weather lowered output in China, the world’s biggest consumer and producer. San Francisco-based Gap, the largest U.S. apparel chain, cut its full-year profit forecast by 22 percent in May, citing higher costs, while Polo Ralph Lauren Corp. posted a 36 percent decline in net income in the quarter ended April 2.

Prices have dropped more than 45 percent from the record on signs of slowing global demand, particularly in China. Cotton for December delivery fell by the 5-cent exchange limit, or 4.1 percent, to $1.164 at 10:14 a.m. on ICE Futures U.S. in New York. That’s the lowest since Nov. 30.

“On one hand, output is declining in the U.S., and on the other, demand has taken a severe hit,” said Peter Egli, the director of risk management in Chicago at Plexus Cotton Ltd., a U.K.-based merchant. “Higher prices have rationed demand.”

The drought in Texas, which accounted for 44 percent of the nation’s harvest last year, may accelerate a projected drop in production in the U.S., the world’s largest exporter, and revive prices. Only about a third of the acres in Texas are irrigated.

Cotton may climb to $1.59 by end of year, according to a Bloomberg survey of 14 analysts and traders.

USDA Crop Estimate

The USDA on June 9 slashed its forecast for the total U.S. crop to 17 million bales, from 18 million in May, citing the worsening conditions in Texas. That would mean a 6.1 percent decline from a year earlier, when output was 18.1 million bales. A bale weighs 480 pounds (218 kilograms).

That was the first time since the drought of 1998 that the USDA lowered its production outlook in June, according to Sharon Johnson, a senior analyst at Penson Futures in Atlanta.

“We will see more cuts as the year progresses and the extent of damage becomes more evident,” Johnson said.

Without rain soon, output will drop more than the government’s forecast, said Gary Raines, an economist at FCStone Fibers & Textiles in Nashville, Tennessee. Plexis Cotton’s Egli said production may fall to less than 15 million bales.

Declining Production

U.S. production is expected to be lower even after farmers boosted planting. A USDA survey of growers released today showed that 13.725 million acres were sown, compared with 12.565 million estimated in March.

The condition of the Texas crop as of June 26 matches the low of August 2006, which was the worst since rating records are available from the USDA going back to 1986.

Craig Heinrich, a 44-year old farmer near Lubbock, said he already has abandoned half of his 2,400-acre cotton crop because of the drought and high winds. Heinrich said he’ll seek to collect on his policy with Armtech Insurance Services.

“If beneficial rain doesn’t fall in most areas of Texas soon, claims will most likely be higher than in years past,” said Tom Zacharias, the president of Overland Park, Kansas-based National Crop Insurance Services. In 2008, farmers held $90 billion in insurance covering 272 million acres nationwide, the highest liability ever, he said.

Ted Etheredge, the president of Armtech Insurance, declined to comment. Officials from 14 other companies designated by the USDA to provide coverage through a government reinsurance program were either unavailable or declined to comment.

Texas Harvest

Texas may harvest 3.5 million acres (1.4 million hectares) if the present conditions prevail, FCStone’s Raines said. That compares with 6.115 million planted acres projected by the USDA in March after surveying farmers.

Tropical Storm Arlene, the first named storm of the Atlantic hurricane season, may bring rain to the region over the next several days, according to Donald Keeney, a meteorologist at Rockville, Maryland-based MDA Information Systems Inc.

“Maybe some rain now can save parts of the irrigated area,” said Heinrich, the Texas farmer. “For most of the area, it’s just too late.”

To contact the reporter on this story: Debarati Roy in New York at droy5@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net.

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