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Texas Dust Bowl Drives Cotton Rally as Perry Prays for Rain

The worst U.S. crop conditions since the dust bowl era of the 1930s are tightening domestic supplies of cotton and boosting prospects for a rebound in prices that fell more than any other commodity this year.

Withering fields in Texas, the largest U.S. grower, led Governor Rick Perry, a Republican presidential candidate and the son of a cotton farmer, to ask supporters to pray for rain to end a “monster drought” shrinking cattle herds and killing crops. Cotton futures in New York may rise as much as 15 percent by the end of December to $1.20 a pound, the median of 17 estimates in a Bloomberg survey of analysts showed.

“It’s by far the worst drought I’ve ever been through,” said Dahlen Hancock, 52, who has farmed cotton for three decades near Lubbock, Texas, and lost more than half of the 5,850 acres he planted this year. “We thought we’d kind of seen it all, to some degree. This rewrote the books.”

Shortages in everything from corn to coffee are spurring speculators to buy crops, anticipating that slower economic growth will still mean supply deficits. At a time when bets on higher oil prices dropped 13 percent in seven weeks and those on copper disappeared, wagers on 11 agricultural commodities rose 38 percent, U.S. Commodity Futures Trading Commission data show.

Cotton slumped 52 percent since reaching the all-time high of $2.197 in March and encouraged U.S. farmers to allocate 25 percent more acres to the crop. This year’s 28 percent plunge in prices is the worst among the Standard & Poor’s GSCI gauge of 24 commodities, which rose 4.2 percent.

Gap, American Eagle

The MSCI All-Country World Index of equities fell 9.1 percent, and Treasuries returned 7.2 percent, a Bank of America Merrill Lynch index shows. Costlier fiber may raise costs for clothing companies from Gap Inc. (GPS) to American Eagle Outfitters Inc.

The drought in Texas and parts of five neighboring states may exacerbate gains in United Nations-tracked world food prices, which held near a record in June. Global corn stockpiles will slide for a third year through August 2012, as a record harvest fails to meet demand, U.S. Department of Agriculture data show. Wheat inventories will shrink for a second year, and soybean supplies will drop, the USDA estimates. Damage to grazing pastures means the U.S. cattle herd on July 1 was the smallest for that date since at least 1973.

The USDA expects 30 percent of the domestic cotton crop will be lost, topping the previous record of 27 percent in 1933, when dust storms wiped out fields in Texas and Oklahoma amid the Great Depression.

Crop Insurance

Insurance and programs to conserve soil and water are helping today’s farmers avoid the same economic devastation, according to Jon Devine, a lead economist at Cotton Inc., a trade group based in Cary, North Carolina.

Claims will be higher than in recent years because of damage to non-irrigated, dry-land cotton and crops on farms with access to stored water supplies, according to Ted Etheredge. He’s the president of Lubbock, Texas-based Armtech Insurance, the fifth-largest U.S. writer of federally sponsored crop policies.

U.S. farmers are expected to make record profit this year, the USDA estimates. Farm income may reach $94.7 billion in 2011 and cotton farmers’ average net-cash profit, or earnings used to pay expenses and debt, may rise 21 percent to $294,200 this year, for a second consecutive gain, the USDA estimated in February.

Monitored Warehouses

The U.S. may harvest about 16.55 million bales of cotton in the year that began Aug. 1, down 8.6 percent from an estimated 18.1 million bales in the previous season, according to the USDA. A bale weighs 480 pounds, or 218 kilograms.

Cotton may rally because the U.S. has “basically run out of stocks this year” until the harvest begins in October, said Peter Egli, a Chicago-based director of risk management at merchant Plexus Cotton Ltd. The government estimates American stockpiles at the end of July were the lowest in 15 years. Inventories in warehouses monitored by the ICE Futures U.S. exchange plunged 86 percent this year.

“This bottleneck situation could temporarily spike prices,” Egli said. Manufacturers “don’t have to panic,” because supplies from Australia and Brazil will compensate for U.S. losses when they are available for shipment in May and June, he said.

Global production is forecast at a record 122.7 million bales, up 7.1 percent from a year ago, according to the USDA. Worldwide consumption will rise 1.1 percent to 115.2 million bales, the estimates show.

Chinese Production

In March, cotton surged to the highest in 140 years of trading in New York as flooding in Pakistan and freezes in China ruined crops.

Output in India, the largest exporter after the U.S., may jump to a record in the season ending Sept. 30, according to the country’s Cotton Advisory Board. Australia, the third-biggest exporter, may plant a record crop in 2011-2012, industry group Cotton Australia said Aug. 10. Production in China, the world’s top grower, may rise for the first time in four years, according to Beijing Orient Agribusiness Consultant Ltd.

Concern about economic growth may curb demand, limiting the rally anticipated in the Bloomberg survey. The U.S. will expand at an average 2.3 percent annual rate in the second half of the year, about a percentage point less than projected in July, the median estimate of 53 economists surveyed by Bloomberg showed.

Economic Growth

Gross domestic product climbed at a 1 percent annual rate from April through June, less than previously estimated, capping the weakest six months of the recovery that began in mid 2009, revised Commerce Department figures showed on Aug. 26.

Slowing job growth and plunging confidence, exacerbated by political gridlock and financial-market turmoil this month, threaten to weigh on consumer and business spending for the rest of the year. The Federal Reserve’s policy-setting committee said Aug. 9 that growth is “considerably slower” than anticipated.

Global consumption slid 11 percent to a four-year low in the 2008-2009 marketing year, amid the worst global recession since World War II. U.S. use fell to the lowest in at least four decades. U.S. apparel imports dropped 12 percent to $64.3 billion in 2009, according to the National Council of Textile Organizations.

World use also declined during the U.S. recessions in 1990-1991 and 1981-1982, USDA data show. Futures fell by at least 10 percent during four of the past six recessions. The biggest decline in that time was 44 percent, from 1973 to 1975.

Buying Underwear

“The consumer gets the final vote,” said Mike Stevens, an independent trader in Mandeville, Louisiana. “The mill could buy the cotton, the mill could spin it, and make it into a t- shirt or underwear, but somebody’s got to take that off the shelf. If you’re a guy out of work, he’s not running here buying new underwear tomorrow.”

The 7.6 percent rebound in global demand after the end of the U.S. recession helped push futures up 54 percent in 2009 and 92 percent in 2010. In the year ended July 31, U.S. exporters booked a record number of cotton shipments for the marketing year that began this month, according to Devine of Cotton Inc.

Texas farmers produced $1.15 billion of cotton in 2008, boosting the state’s $1 trillion economy, data from the National Cotton Council and the Department of Commerce show. The state’s cotton industry employs more than 38,000 people, generating about $5.5 billion of revenue.

Abandoning Crops

Farmers have abandoned 54 percent of cotton fields in the High Plains region of Texas, the biggest growing area, according to Plains Cotton Growers Inc., a Lubbock, Texas-based industry group. This year’s drought caused a record $5.2 billion in farm losses across the state, according to Texas A&M University.

“My dad was a dry-land cotton farmer,” Governor Perry said in a speech while standing on bales of hay at the Iowa State Fair in Des Moines on Aug. 15. “You want to know how I learned my faith? Be a dry-land cotton farmer, and you understand that you’re going to spend a lot of time asking the good Lord to do something on the weather side of things.”

Conditions today in the south central U.S., particularly in Texas and Oklahoma, are the worst since at least the dust bowl era, said Gary Raines, an economist at industry consultant FCStone Fibers & Textiles in Nashville, Tennessee.

Worsening Conditions

The conditions that caused the drought will probably persist or intensify, according to Chris Hyde, a meteorologist at MDA EarthSat Weather Inc. in Gaithersburg, Maryland. The one- year drought, the most severe on records going back to 1895, goes beyond Texas cotton.

More than 50 percent of the area in a six-state region in the southern U.S., which consists of Texas, Oklahoma, Arkansas, Louisiana, Mississippi and Tennessee, is experiencing “exceptional” drought, according to the University of Nebraska Lincoln’s U.S. Drought Monitor. Oklahoma had the hottest July ever, according to the Oklahoma Climatological Survey.

In Texas, the second-biggest winter-wheat grower and the biggest cattle producer, 99.9 percent of the state is suffering from drought, and 96 percent of pasture and range conditions were rated “poor” or “very poor” in the week ended Aug. 21.

Clothing retailers are still contending with the surge in prices over the past two years. San Francisco-based Gap, the largest U.S. apparel chain, reported Aug. 18 that second-quarter profit fell 19 percent as higher retail prices failed to cover the gain in manufacturing costs.

Squeezing Profit Margins

“Companies have seen 10 to 20 percent year-on-year cost increases” in cotton and other raw material costs, said Adrienne Tennant, an analyst at Janney Montgomery Scott LLC in Vienna, Virginia. “The price increases that we saw six to nine months ago are showing up in products now.”

Cotton will squeeze margins in the second half of the year for American Eagle Outfitters Inc. (AEO), the Pittsburgh-based teen- apparel chain, Chief Executive Officer James O’Donnell said Aug. 24 on a conference call with analysts. The company lowered its full-year profit forecast to 85 cents to 95 cents a share, from a May projection of $1.02.

The slump in prices since March won’t reduce costs until later this year, Susan McGalla, chief executive officer of Wet Seal Inc. (WTSLA), the Foothill Ranch, California-based apparel chain, said in a conference call with analysts Aug. 18.

“When we think about buy, hold or short, cotton’s definitely something that we would lean toward buying,” said James Dailey, who manages $200 million at TEAM Financial Management LLC in Harrisburg, Pennsylvania. “You just look across the supply and demand situation for a lot of agricultural commodities, they’re very tenuous.”

To contact the reporters on this story: Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net; Joseph Richter in Washington at jrichter1@bloomberg.net

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

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