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UPDATE 2-USDA raises cotton stock estimate again; prices fall

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* Third consecutive monthly increase in inventory forecast

* Most of drop in Chinese demand offset elsewhere - USDA

* U.S. output estimate raised on Mississippi Delta crops

(Updates throughout)

Oct 11 (Reuters) - The U.S. Department of Agriculture hasraised its 2012/13 global ending stock forecast for cotton torecord highs for a third consecutive month, sending prices downand reinforcing concerns about weakening demand from China, theworld's largest textile market.

The government raised its inventory forecast for the seasonto end-July 2013 by 3.4 percent to a record of 79.11 million480-lb bales due to a combination of sharply higher productionand reduced consumption.

It was its third monthly increase since the new marketingseason started on Aug. 1 and the highest since records began in1960. The new total would also represent a 14-percent jump from2011/12's 69.56 million bales.

Market participants were alarmed that the USDA cut itsconsumption rate for China by 2 million bales to 36 million,citing falling demand from mills, which have bought less due tohigh domestic prices.

"The high domestic support price continues to erodeofftake," the report said.

It also raised its output forecast for the world's top threeproducers, China, India, the United States, as well as othermajor growers Brazil and Pakistan, taking the total up 2 percentto 116.32 million bales.

"It's a bearish rollercoaster," said Keith Flury, seniorcommodities analyst at Rabobank, pointing to falling consumptionestimates for China, the world's largest user.

The benchmark December cotton futures in New Yorkwere down 1.5 percent at 71.02 cents per lb by 11:59 a.m. EDT(1559 GMT), on track for their largest one-day fall in twoweeks.

Prices fell as low as 70.41 cents immediately after thepublication of the USDA report, but recovered some lost groundafter hitting near-term technical supports. Before the report'srelease, prices were down 1.08 percent at 71.32 cents.

While the report was bearish overall, prices were cushionedby a rallying grains market, said Sharon Johnson, a cottonspecialist at Knight Futures in Atlanta, Georgia.

"(Grains) prices are moving higher and may provide someindirect support for cotton. At the very least, I look for atest of the 70.22 (cent) recent low basis December," she said.

A close below 70.65 cents per lb, the lowest in the past twoweeks hit on Sept. 28, would signal additional downsidepressure, she said.

SPINNING RELIEF

Comments about an uptick in demand for raw cotton from otherAsian countries provided some relief for traders and growers whofear that Chinese mills will cut their buying even further.

The report said the majority of the drop in Chinese demandwas offset by an increase from other major spinning countries,including India, Turkey, Pakistan, Indonesia, Taiwan andVietnam.

Those countries have access to cheaper raw cotton than theirChinese counterparts and have as a result increased theirbuying, it said.

Beijing has set local prices at around $1.40 per lb, almostdouble exchange prices, in an attempt to support the country'smillions of farmers, traders have said.

While helping the agricultural industry, the strategy hashurt mills, whose margins have been squeezed, forcing them toimport raw fibers when quotas are available. Those are limitedin supply though and incur a hefty import duty if the finishedproduct is not re-exported.

As a result, integrated mills buy more yarn, a semi-finishedfiber, to process into finished product. That is more costeffective than buying and processing raw fibers, traders said.

That displacement of demand to other parts of the worldshould help alleviate concerns in the global cotton market aboutfalling consumption, although some question how long Beijingwill allow its mills to follow that strategy.

RISING U.S. OUTPUT

In its U.S. assessment, the USDA raised its output forecastby 1 percent to 17.29 million 480-lb bales even after the recentwet weather in west Texas, the country's main growing region.

That is up from an estimated 15.57 million in 2011/12 and isdriven by increases in the Mississippi Delta states.

Heavy rain can damage quality and quantity of crops becausemost bolls, which are the protective capsule surrounding thefiber, are open this far into the season.

Exports were cut by 200,000 to 11.6 million bales due toslowing buying from China, while ending stocks rose by 300,000to 5.6 million bales.

(Reporting by Josephine Mason in London; Editing by DaleHudson, John Wallace and Bob Burgdorfer)

((Josephine.Mason@thomsonreuters.com)(+1 646 223 8925))

Keywords: COTTON USDA/CROP