LAMESA, Texas—This time of year, Shawn Holladay is usually sitting atop a tractor, laying cotton seeds into rows of red soil on his farm here on the High Plains.

But less than 2 inches of rain has fallen across much of West Texas since last October, compared with an average of about 10 inches over the same period last year. With his fields bone dry, Mr. Holladay and many other farmers in the Texas Cotton Belt have held off putting seeds in all but small patches of irrigated ground out of fear they will simply dry up.

“The way it’s going right now, the chances are slim to none we will have a crop,” the 49-year-old Mr. Holladay said as he inspected his fields earlier this month.

After three fairly wet years, a drought ranging from “severe” to “exceptional” has descended on the southern Great Plains of Colorado, Kansas, New Mexico, Oklahoma and Texas, according to the U.S. Drought Monitor at the University of Nebraska-Lincoln. Home to one of the nation’s most fertile farming areas—crop production in the Texas region alone generates about $12 billion in economic activity—observers say the drought could punish the agricultural sector, affecting everything from cotton to cattle to farming-equipment sales.

“It’s going to be in the billions in terms of crop loss,” said Darren Hudson, director of the International Center for Agricultural Competitiveness at Texas Tech University in Lubbock.