March 20 (Bloomberg) -- Cotton prices gained the most in almost two months on renewed concern that a drought will damage the crop in Texas and on speculation the Federal Reserve’s bond- buying plan will spur inflation and demand for commodities.

Texas, the largest U.S. grower, is experiencing a “severe drought,” the National Weather Service said. Below-average precipitation may last into May, the middle of cotton-planting season in West Texas, said Drew Lerner, president of World Weather Inc. in Overland Park, Kansas. An index measuring the dollar against six other currencies fell 4.1 percent this week.

Hot, dry weather forecast in Texas for the next three months is “adding some underlying support” to prices, said Sharon Johnson, a senior cotton analyst at First Capitol Group in Atlanta. “We might be seeing some follow-through buying from foreign mills” as the weaker dollar makes U.S. cotton cheaper, she said. The U.S. is the world’s largest cotton exporter.

Cotton futures for May delivery rose 1.21 cents, or 2.8 percent, to 44.08 cents a pound on ICE Futures U.S. in New York, the biggest one-day gain since Jan. 26. The most-active contract is up 2.9 percent this week after climbing 3.4 percent the previous week.

Texas Crop

Farmers in Texas planted more than half the 9.47 million acres that were sown with cotton in the U.S. last year, government data show.

“Since Texas accounts for a greater portion of acres, their weather is more important,” Johnson said. “You can’t go without rain in West Texas. You really have to have low abandonment and near-average yield.”

While Texas planted more than 5 million acres (2 million hectares) of cotton in 2008, growers harvested 3.4 million, U.S. Department of Agriculture data show. The yield fell to 650 pounds an acre last year, partly due to dry weather, from 843 pounds a year earlier, according to the USDA.

Cotton still is down 38 percent in the past year on concern the recession will lead to reduced consumption of clothing and textiles.

“In the short-term, the market may still struggle to get past the mid-40s based on the prevailing bearish fundamentals for cotton, and we may even see a re-test of the lows over the coming weeks,” Plexus Cotton Ltd. said yesterday in a report.

“This week’s blunt Fed action is a game changer that will slowly but surely lead to a shift in market psychology,” Plexus added. “Inflation fears will become more pronounced and the U.S. dollar will come under increasing pressure, which should underpin commodity prices.”

While Goldman Sachs Group Inc. reduced its three-month cotton forecast in a report yesterday to 45 cents a pound from 50 cents, the bank maintained its 12-month forecast at 60 cents.

To contact the reporter on this story: Shruti Date Singh in Chicago at ssingh28@bloomberg.net.

Last Updated: March 20, 2009 16:06 EDT