March 21 (Bloomberg) -- The longest cotton rally in four years and a lingering drought in the southern Great Plains are forcing farmers in the U.S., the world’s biggest exporter, to reconsider a shift to other crops.
Planting may total 11 million acres, 10 percent more than a Feb. 22 government forecast of 10 million, said Jordan Lea, the chairman of Eastern Trading Co., an exporter in Greenville, South Carolina. Prices are up 37 percent from a 31-month low in June and heading for a fifth monthly gain, the longest since July 2009. Corn fell 3.4 percent since the end of October.
The price surge was the "number one" reason "for me switching back to cotton," said Randy McGee, 35, who farms 1,200 acres in Idalou, Texas. He’s ditching plans to sow corn and sorghum on 300 acres of non-irrigated land that he now plans to use for cotton. "December grain and corn prices aren’t looking too promising. I’m sending my seed back."
After the worst U.S. drought since the 1930s sent corn and soybean futures to records last year, the government said cotton planting would drop 19 percent in 2013 as farmers sowed more profitable crops and slowing demand in China, the world’s largest importer. The lingering dry spell in the Plains has left some areas without enough soil moisture to grow grain, and the rebound in prices sent cotton to the biggest gain this year of any commodity.
"Cotton has been buying acres since the beginning of the year," Lea, a former president of the American Cotton Shippers Association, said in an e-mail. "The forecast drop in acres was probably somewhat exaggerated."
Cotton for May delivery fell 0.2 percent to 88.9 cents a pound on ICE Futures U.S. in New York, leaving the most-active contract up 18 percent this year, the most among 24 commodities tracked by the Standard & Poor’s GSCI gauge. Prices may reach 95 cents by the end of 2013, according to the median of 16 estimates from analysts and traders in a Bloomberg survey last month.
If the December futures contract tops 90 cents before the end of March, up from yesterday’s close at 87.98 cents, farmers will sow as much as 1.5 million acres more cotton than the government forecast, O.A. Cleveland, an agricultural economics professor at Mississippi State University in Starkville, said in a March 8 report.
The U.S. Department of Agriculture forecast an 18 percent drop in production to 14 million bales this year from 17.01 million last year, when farmers sowed 12.32 million acres. On March 28, the department will release its first estimate of planting intentions based on a survey of growers. In 2011, output was 15.57 million bales, after the worst drought in at least a century decimated crops in Texas, the biggest producer.
Growers in Texas need to plant cotton as early as mid-May in some areas to qualify for crop insurance, according to Plains Cotton Growers Inc., an industry group in Lubbock. The state produced about 5.5 million bales last year.
As of March 12, about 54 percent of Texas was in severe drought, which means crop losses are likely and water shortages are common, according to the U.S. Drought Monitor. While that’s down from 71 percent a year earlier, conditions in many areas may be too dry for any crop except cotton, according to Texas A&M University in College Station.
"People don’t understand the seriousness of the drought here," said Brad Heffington, a 45-year-old farmer who has a 5,700-acre cotton farm in Littlefield, Texas. Heffington had planned to use 1,500 acres to grow corn and sorghum this year. Instead, he may plant 750 because it has been so dry.
Corn requires 30 inches to 35 inches of total rainfall and irrigation water during the growing season to get maximum yield, while cotton requires 20 inches to 24 inches, he said. His farm got 7.5 inches of rain since July 3, 2010.
Unlike grains, cotton can survive heat extremes or short- lived dry periods, said Gaylon Morgan, a professor and cotton specialist at Texas A&M. The plant will shed a portion of its fruit during dry conditions and resume development when rain returns, Morgan said in an e-mail.
"Grain crops simply have lower yield," said John Robinson, an agricultural economist at Texas A&M. "Cotton pencils out to a higher net return than grain crops in dry conditions." Texas farmers may sow 5.5 million acres this year, 12 percent higher than the 4.9 million predicted by the National Cotton Council in February, Robinson said.
While some cotton-growing regions in Texas have seen more rainfall than last year, drought conditions that began two years ago are expected to persist or intensify across almost all of Texas during planting and early growing season, according to the National Weather Service.
"They still have a long way to go with moisture deficits," said Joel Widenor, director of agriculture services for Bethesda, Maryland-based Commodity Weather Group LLC. "They’ve built up a long-term deficit where if you pick up some precipitation it’s not going to make a big dent."
Protection from crop insurance also is getting a boost from the rally in prices, further encouraging farmers to consider cotton. On the Littlefield farm that Brad Heffington runs with his 20-year-old son, Tanner, the payout for damaged crops would be $160 for every acre of cotton, compared with $40 for sorghum, an alternative for non-irrigated land.
"With cotton insurance, it’s just hard not to go with that," said McGee, the Idalou farmer. "If the crop falls out, you’re guaranteed there."
Payout rates for crop insurance are essentially set using the average of futures prices, Texas A&M’s Robinson said. In some areas, it’s as much as 83 cents a pound, he said.
"Insurance is relatively high," which "encourages more planting," Robinson said. "The higher price probably gives growers hope, but they have to believe these high prices will be there at harvest time."
--Editors: Steve Stroth, Thomas Galatola
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