TO Dan Taylor, who has grown cotton for three decades, the fibre's surging price is downright scary.

Cotton futures for about a month have been setting fresh 140-year highs, and many days have hit the limit on price increases set by the exchange. Prices have doubled since early July.

Growers in the High Plains of Texas, which produces about a third of the US cotton crop, locked in prices well before the latest leg of the rally -- and they have no regrets.

In fact, farmers, long attuned to the fibre's boom-and-bust cycle, have already sold their cotton forward at prices well below those indicated by the futures market, a sign that this year's price surge is unsustainable.

Today, cotton futures fell for the first time in eight trading sessions and were recently 3 per cent lower at $US1.4668 a pound on ICE Futures US. Most other commodities were lower after several spiked to multiyear highs yesterday.

"We've never been at that price before so, when it does start dropping, it's going to be brutal," Mr Taylor said. In an attempt to pre-empt a crash he believes is imminent, Mr Taylor said he has already sold half of his 2011-2012 crop at US82 cents to US93c a pound.

"When time to harvest comes next year, that might be a very good price," Mr Taylor said. "You can't be too greedy."

While much of the surge is cotton prices is justified by a supply shortfall caused by bad weather and flooding in key producers China and Pakistan as well as aggressive buying by textile mills in Asia, the magnitude of the rise can't be explained by fundamental factors, analysts say, pointing to speculative investors such as hedge funds.

"Everything indicates that we should have more cotton next year and that will dump prices next (northern) summer and autumn," said Sharon Johnson, a senior cotton analyst at First Capitol Ag in Atlanta.

World cotton production, which sagged in the last two years due to the global financial crisis, is expected to rebound 13.7 per cent to 115.25 million bales in the 2010-2011 marketing year, according to the US Department of Agriculture.

In response to higher cotton prices, major growing areas are seen as boosting production.
Australia is expected to double its previous year's crop, while Brazil and India are seen as increasing output 40 per cent and 12 per cent, respectively, according to the US government.

High prices are also pushing mills to switch to cheaper man-made fibres such polyester, which will slow down cotton demand, Ms Johnson said. Cotton accounts for about 35 per cent of total world fibre use. Several retailers have already said they will increase prices on clothing in early 2011.

This is reflected in the price of cotton for delivery further out in the future. December 2011 cotton has risen by 35 per cent since July, while the front-month contract has doubled.

Farmers still consider that a good price. Two years ago, they were selling their cotton for US50c to US55c a pound, about US10c below the cost of production.

Brad Heffington, a 43-year-old farmer who farms about 2428 hectares in Lamb County, Texas, said he has sold most of this year's production for US74c, US77c and $US1.01 per pound and some of his next-year production for more than US80c a pound.

Those prices are high enough to allow him to pay down some of the debt amassed over the past two years when bad weather damaged his crop.

"I don't have any big plans to invest in new equipment," Mr Heffington said. "I'm planning to pay for what I lost and save for another bad year."

Farmers sell through a co-operative pool system, set up to offer a stable average price for the year.

"The whole idea of the pool is to reduce risk, not necessarily to hit the highest point of the market," said Grady Martin, director of sales at the Plains Cotton Cooperative Association, a farmer-owned cotton marketing organization based in Lubbock.
This association is one of the largest handlers of cotton in the US, the world's biggest exporter.

Generally, farmers put between 50 per cent and 90 per cent of their production in a pool while they sell the rest either through direct contracts with buyers worldwide or through an electronic exchange.

Thomas Hicklen, a 45-year-old former soldier who served in the first Gulf War and who became a farmer after marrying a Texas farmer's daughter, has been working 20 hours a day since the harvesting season started a month ago.

He said he sold almost all of this year's harvest for less than $US1 a pound. Despite current record prices, he said he is happy with his decision.

"If you keep everything open hoping for higher prices, you get more risk," Mr Hicklen said.

Mr Hicklen said he has already contracted a third of next year's crop at US88c a pound and another third at US98c.

"At that price, I still will make money," he said.