* Average trading volumes in July fall
* Cotton ends July almost unchanged
* USDA's monthly crop report eyed

NEW YORK, July 31 (Reuters) - Cotton futures were flat to
slightly higher on Tuesday after a drop in exchange-certified
stocks, although investors were cautious after the fiber's muted
performance in July and ahead of the U.S. government's next crop
report.

The benchmark December cotton contract on ICE Futures
U.S. settled at 71.34, up just 0.30 percent from Monday, but off
an intraday high of 72.35 cents.

Traders pointed to short-term factors that helped lift
prices slightly, including a drop in certified stocks of almost
11,000 bales to 44,363 and reports that Pakistan, one of the
world's largest producers, may not stop exports briefly until
the country's authorities approve new licenses.

"There's a series of conflicting information. There's a
dramatic drop in (certified) stock, (...) Pakistan's authority
to export cotton has expired until they reauthorize," said John
Flanagan, analyst at Flanagan Trading Corp in North Carolina.
Export approval in Pakistan is an administrative procedure
and any halt to shipments is unlikely to disrupt supplies, but
the news provided an otherwise downbeat market a small boost.

But prices are still vulnerable to the downside due to low
demand and the global surplus, traders warned.

Flanagan said they could fall as low as 60 cents, which
would be a break through support at 65 cents which was tested in
the last sell-off in early June.
It would also be a return to levels last seen in October
2009 when the ailing global cotton industry was recovering from
plunging demand at the height of the world financial crisis.

SUBDUED JULY

July was marked by a sharp slump in trading volume and
stagnant prices as the market struggled for direction while
grains prices soared as the corn belt scorched in the heat.

Prices were up just 0.20 percent from the end of June having
traded in a tiny 4-cent range. That was its smallest monthly
range since March 2007, according to Thomson Reuters data,

While it is not unusual for volumes to swing either way on a
day-to-day basis, the drop in July's average was noticeable for
its size.

Cotton's average daily futures volume for the month was just
over 15,000 lots, almost half the daily average for the year to
date, according to ICE data.

Seasonal factors such as the summer holiday in the northern
hemisphere may account for some of the drop, but the decline
bucked an otherwise steady performance by the exchange's softs
contracts, cocoa, coffee and sugar.

HOPING FOR DIRECTION

Traders attributed the fall in volumes and lackluster price
moves to caution ahead of the much-anticipated monthly crop
report from the U.S. Department of Agriculture on Aug. 10, which
will give a nervous market a peek into the state of the 2012/13
harvest and even perhaps some direction.

The report will include the first estimate of cotton crops,
including yields, as harvest nears based on field surveys and
interviews with growers.

Estimates for 2012/13 world-ending stocks will be keenly
awaited after the government cut its estimate to 72.39 million
(480-lb) bales in July's report from its previous forecast of a
record 74.51 million bales.

That gave prices a fillip at the time, although traders are
still concerned about the global surplus even with the torrid
weather potentially disrupting harvests outside the United
States. India, one of the world's largest producers, is facing
its second drought in four years.

"Any number that is an increase in ending stocks will be
bad," said Flanagan.

MARCO WATCH

The market also tracked the euro, which rose against the
dollar even as hopes that the European Central Bank will take
action to stimulate the ailing euro-zone economy waned.

The gains came as Federal Reserve began a two-day policy
meeting on Tuesday. Its decision will be announced on Wednesday,
but economists expect policymakers to sit on their hands for
now.