* Fiber jumps to 89.15 cents, highest since early May 2012
* Mills have ‘gaps’ to fill – analyst
* Supplies seen to be tight despite forecast record surplus
NEW YORK, March 13 (Reuters) – Cotton jumped to a 10-month high and posted its largest daily gain in two weeks on Wednesday as short-covering and mill-buying boosted prices in late trading.
The most-active May cotton contract on ICE Futures U.S. gained 1.28 cents, or 1.5 percent, to settle at 88.61 cents per pound, after earlier jumping to 89.15 cents, the highest level since May 2, 2012.
It was the contract’s largest daily gain since Feb. 27.
Prices have surged more than 16 percent since the start of the year, driven as speculators increased their bullish position in cotton futures and options to the highest levels since September 2010.
Commercial dealers have ratcheted up their net short position to similarly high levels in response. The situation has left cotton prices prone to short-covering rallies, dealers have said.
“We made that new high today, so some of the shorts are nervous,” said Nick Gentile, senior partner at commodity trading consult Atlantic Capital Advisors.
Short-covering boosted prices in late trading and added to the recent support prices have found in steady buying from mills, undeterred by the recent rally. Prices have risen in 10 of the past 12 sessions.
“Mills still have considerable gaps in their coverage, but supplies of cotton outside of Chinacontinue to shrink,” said Knight Capital’s cotton specialist, Sharon Johnson.
The U.S. Department of Agriculture revised its forecast for global consumption higher last week, citing the recent strength of U.S. sales and shipments.
While the USDA has forecast a record global surplus at the end of marketing year in July, more than half of those reserves are expected to be within China’s stockpiles and seen as unavailable to the global marketplace.
Beijing began building its stocks in 2011, paying above global prices to support farmers.
The world’s largest consumer is forecast to have enough cotton in its stocks by the end of the marketing year to feed its needs for cotton for more than a year.
Before 2013’s steep gains, fiber posted two years of losses, as lower-priced, man-made alternatives eroded demand and global surpluses grew.
Volumes were heavy on Wednesday, with about 29,000 lots traded, nearly 20 percent higher than the 30-day average, preliminary Thomson Reuters data showed. (Reporting by Chris Prentice; Editing by Peter Galloway)