* Open interest highest since Feb 2011
* Backwardation seen drawing fibers to exchange
* Fund index rolling will start next week

NEW YORK, Oct 22 (Reuters) - U.S. cotton futures rose
slightly on Monday, consolidating just below 77 cents per lb, as
speculative and trade investors continued to build their bullish
bets on nearby prices due to a shortage of certified exchange
stocks.
Concerns about a nearby squeeze kept the front-month
contract firmly above the forward market, resulting in what is
known as a backwardation of over 1 cent.
The most-actively traded December cotton contract on ICE
Futures U.S. settled at 76.93 cents per lb, up just 0.07
percent. The market stabilized after hitting its highest level
since May, just below 80 cents, last Thursday.
In contrast to the support under the nearby contract, the
March contract slipped 0.06 percent to 75.38 cents,
leaving the backwardation at 1.55 cents. That was down from over
2 cents last week, the market's first inversion since June.
With nearby prices well above the forward curve, merchants
are likely to try to cash in by certifying material with the aim
of potentially delivering against the board.
"It gives merchants the incentive to bring material to the
board," said Andy Ryan, risk management consultant at INTL
FCStone.
With the backwardation expected to draw fiber into the
market, traders are watching for any rise in newly certified
stocks or material awaiting review for certification.
Some 1,452 lots were pending review as of Friday, with
stocks as low as 8,433 480-lb bales.
Investors continue to build a long position, with open
interest - the number of outstanding contracts - rising above
207,000 on Friday.
That is its highest level since Feb. 10, 2011, just a month
before prices topped out at a record $2.27 per lb, exceeding
even their U.S. Civil War peak from 1861. Prices then more than
halved by July, causing the longest and more tumultuous periods
in the market's history.
The race to the top prompted farmers to walk away from
contracts signed below $1 per lb just six months before. In
turn, the plunging market meant textile mills defaulted on their
purchases signed at the peak of the market.
While price volatility has ebbed this year, reneging has
become endemic, with counterparties quicker than ever to walk
away from deals if prices shift.

BUILDING LONGS
Government data on Friday showed hedge funds and other
speculative investors switched to a net long position in the
week to Oct. 16. They had been short for the two
weeks prior.
Index funds will start selling their long positions in the
December contract next week - the rolling will take place
between Oct. 30 and Nov. 7 - and buying March.
That will exert some pressure on the front-end prices and
boost March, and return the market to a full carry, traders
said.
The March price needs to be 2.5 cents per lb above December
to be at full carry, meaning it covers cost of holding the
commodity until delivery. Full carry has eluded the market since
October 2009 before the market was gripped by a deficit and
prices started their year-long rally to records above $2 last
March.
While the market is focused on nearby supplies, global
fundamentals are not as bullish as last week's spike would
suggest, traders said. Prices gained over 7 percent on the week,
the market's biggest rise since mid-June.
The past week has seen the market surpass several milestones
set in June - it was the last time the market was inverted, and
until the rise on Friday open interest was just shy of a
five-month high.
In June, front-month prices spiked to close to 90 cents amid
similar fears about a short-term squeeze in supplies of U.S.
cotton deliverable against the board ahead of the July contract
expiry.