* USDA widely expected to raise 2014/15 U.S. output forecast
* Short-covering, buy-stops lift July contract over 2 pct
* July contract's premium over December prices jumps
NEW YORK, June 10 (Reuters) - Benchmark cotton futures inched lower on Tuesday in heavy and volatile dealings as traders positioned themselves ahead of a monthly U.S. government supply-demand outlook due on Wednesday.
The most-active December cotton contract on ICE Futures U.S. eased 0.04 cent, or 0.5 percent, to settle at 77.25 cents a lb.
But short-covering and buy-stops shot the spot July ICE contract higher, to end the session up 1.75 cents, or 2.1 percent, at 86.30 cents a lb.
Volumes were heavy with the rolling of closely watched index funds from the July contract underway and the contract's options due to expire later this week.
The day's volatile trade reflected traders' expectations that nearby supply tightness in the United States, the world's top exporter, will give way to higher output in the new crop year that begins on Aug. 1.
The U.S. Agriculture Department (USDA) was widely expected to raise its outlook for U.S. 2014/15 production in a monthly forecast on Wednesday because of favorable weather this spring.
The USDA was also expected to raise its outlook for U.S. exports this season, reinforcing worries over tight nearby supplies.
"There is some anticipation for an increase in exports tomorrow," said Sharon Johnson, a cotton specialist with KCG Futures in Georgia, noting that buy-stops propelled gains in the front-month contract.
The spread-related gyrations shot the July contract to a premium of 9.05 cents a lb above the December contract , which represents the new cotton crop.
That was up sharply from 7.26 cents previously, although down from a March peak of 13.68 cents. The premium of spot prices is seen as evidence of tight nearby supplies.
Exchange inventories totaled 414,000 bales on Monday, up from 411,400 and near the highs of July 2013, the most recent ICE data showed. (Reporting by Chris Prentice. Editing by Andre Grenon)
