Cotton ends higher after testing 70 cents

* Cotton recovers from fresh two-month low

* Fresh shorts emerge as open interest jumps over 3,500 lots

NEW YORK, Oct 1 (Reuters) - Cotton prices ended higher on Monday on technical buying after testing the 70-cent mark, with traders expecting renewed pressure ahead of the U.S. harvest.

"This was consolidation trading. It found support at 70 cents," said John Flanagan, an analyst at Flanagan Trading Corp in North Carolina.

New York cotton for December delivery

ended settled at 71.2 cents per lb on ICE Futures U.S., up 0.78 percent. Prices recovered from fresh two-month lows of 70.22 cents.

Gains may only be temporary given the bearish outlook and relentless speculative and producer selling that has pushed prices to two-month lows ahead of the U.S. harvest.

"Any bounce runs into hedging pressure," said Flanagan.

Fresh speculative selling appeared late last week when open interest jumped 3,500 lots on Friday to over 190,000, its highest level since mid-June, according to the latest ICE data.

Speculators have increased their shorts in the past two weeks amid fears that China will start unloading a portion of its massive strategic stockpile.

The latest Commodities Futures Trade Commission data specs are their most bearish since mid-August, having almost halved their net long position in the week to Sept. 25.

The net long of just over 10,000 lots revealed this group of investors were at their most bearish since mid-August.


CFTC graphic:


The market has little support to prevent prices falling below 70 cents, particularly with the widely watched stocks-to-use ratio expected to be a record highs in the season to end-July 2013, traders warn.

The U.S. Department of Agriculture has predicted the ratio at a record high of 71 percent, up from 67 percent in the 2011/12 year, although some analysts are even more bearish.

Morgan Stanley has pegged the ratio at 74 percent with as high as 78 million bales, some 2 million more than the USDA's forecast, which was already a record.

Pressure has emerged amid expectations that China's strategic reserve will sell some of its massive stockpile of fibers to the market.

"While global production prospects remain favorable, the result of better-than-expected weather in the U.S. and China as well as larger planted area in India, we believe that price direction in the coming months will largely be dictated by Chinese government policy in the form of cotton reserve purchases," said Morgan Stanley.

Fibers bucked the downward trend in the grains market, with soybeans falling more than 2.5 percent, although the gains were broadly in line with the equity market and euro, which were buoyed by a rise in U.S. manufacturing activity which bolstered hopes about the health of the world's largest economy.

The Thomson Reuters-Jefferies CRB index

, a global benchmark for commodities, eked out further gains after a stellar third quarter, gaining 0.63 percent on the day.

(Reporting by Josephine Mason)