* Prices fell after stocks hit June 2011 highs
* Late recovery triggered by mill buying - traders
* Traders braced for 'triple witching' on Friday
By Chris Prentice
NEW YORK, Feb 6 U.S. cotton futures rose in late trading on Wednesday, reversing earlier losses as mills jumped in to buy fiber after prices hit a perceived floor.
The most-active March cotton contract on ICE Futures U.S. settled up 0.21 cent, or 0.3 percent, at 81.72 cents per pound.
Buying was triggered after prices fell to an intraday low of 80.99 cents per lb, down 0.6 percent. A five-week rally in prices had eased off after big increases in certified stocks. On Tuesday, they hit twenty-month highs.
The widening contango, with the forward May contract accelerating away from the spot price, prompted textile mills to buy to avoid forking out more down the road. May's premium to March spiked to 0.95 cent on Tuesday and remained firm at 0.83 cent on Wednesday.
That shift was all the more dramatic given that May had been at a 0.69-cent discount to spot, its largest inversion since November, just two weeks ago.
Cotton futures also found support from a forecast on Tuesday by the U.S. Congressional Budget Office that cotton plantings would shrink to the lowest level in four years.
More widely-watched will be the results of the National Cotton Council's plantings survey due on Saturday morning during the association's annual meeting in Memphis, the epicenter of U.S. cotton trading.
Farmers in the world's third-largest producer are expected to sow one of their smallest crops in two decades this year as fibers lose a battle to acreage to the more buoyant grains market, a Thomson Reuters poll showed last month.
Earlier in the day, prices had been under pressure from another steep rise in certified stock levels. Exchange stocks reached 154,738 480-lb bales on Wednesday, up 5.4 percent to their highest level since June 1, 2011, according to ICE data.
With certified stocks climbing, "the market is backing off," said Peter Egli, director of risk management for Plexus Cotton Ltd, a British-based medium-sized merchant.
Stocks have increased every session since Dec. 20 as higher spot prices have lured material to the board and as northern hemisphere farmers wrapped up their 2012/13 harvest.
Another 61,970 bales were awaiting review by the U.S. Department of Agriculture, up almost 10,000 bales from Tuesday.
Fiber's longest rally in two years has shown signs of weakening this week. It was the best performing commodity in January, increasing by a whopping 10.5-percent, mainly due to speculative buying. That helped to offset two years of double-digit percentage falls.
BRACING FOR VOLATILITY
The cotton market was braced for a volatile end to the week with the USDA's monthly crop report due at midday on Friday, coinciding with the expiry of March options and the start of fund index rolls. One trader described it as the market's "triple witching".
While analysts said they expect few changes to the USDA's forecasts, the report is seen as a critical milestone for the massive amount of speculative money that has flowed into the market since the start of the year.
The U.S. government has pegged ending stocks for 2012/13 at a record above 82 million bales, although China, the world's largest textile market, holds half of that total in its strategic stockpile.
"Global fundamentals do not appear to be the driving force behind price movement," Sharon Johnson, cotton specialist at Knight Capital, said in a pre-USDA 2012/13 world cotton production note. (Reporting By Chris Prentice; Editing by Tim Dobbyn)