NEW YORK, Feb 17 (Reuters) - U.S. cotton futures raced to
their 7 cent upside limit shortly after overnight session
opened on Thursday and remained there until the close, setting
a new record, as mills rushed to price cotton ahead of first
notice day.

'They have to price the cotton before first notice day by
contractual obligation,' said Ron Lawson, Managing Director, of
logicadvisors.com tel.

With the Monday U.S. President's Day holiday, next Tuesday
is first notice day and March cotton notices must be submitted
by 5 p.m. EST (2200 GMT) on Friday.

March cotton on ICE Futures U.S. closed up 7 cents,
or 3.55 percent, at $2.0402 cents a lb. an all-time high. Now
benchmark May cotton also soared 7 cents, or 3.59
percent, to the upper limit at $2.0193 and ended there.

Volume in March futures came to 6,975 lots, with open
interest now at 13,427 lots. May volume rose to 9,301 lots with
open interest growing to 70,469 lots.

After both March and May contracts were locked at the 7
cent limit, many players tried to execute their cotton trades
synthetically via the options market. But by mid-morning in New
York, options had advanced to their double limit and trading
was halted in those contracts as well.

Some brokers said mills needing to fix cotton prices bought
on call waited too long to get out of short positions in the
futures market taken out as protection before the cash
contracts were settled.

But too many players waited too long to cover short
positions, until there was a lack sellers, said brokers.

'There isn't one person who's hung, there is a sector of
the market that has held onto its decades-long tradition of
waiting until the last minute to buy and now there's nothing
for sale. So, they have to get out,' said Lawson.

'If you don't get out tomorrow you will have to get out
next Tuesday. After first notice day, however, there is no
price limit. We will know by tomorrow night,' he added.

Some analysts said, there might also be a speculator
holding a short position who was unable to get out. But others
said, open interest patterns, the spec/hedge report, and the
consolidated options report from the CFTC all suggested
speculators have been trading cotton through the options
market. And, March options expired last Friday.

Late on Wednesday, ICE Futures said it raised cotton
margins by 16.67 percent for speculators to $8,400 and for
hedgers to $6,000.

Short U.S. supplies are driving prices to ever higher
record levels and exports have been brisk as well.

On Thursday, the USDA reported another week of hefty export
sales coming in at 188,900 running bales for the current crop
and 110,300 bales for the new crop.

Weekly shipments were healthy at 405,400 running bales,
illustrating the strength of global demand.

Graphic: http://r.reuters.com/gew97r