NEW YORK, Feb 16 (Reuters) - U.S. cotton futures surged to
to their 7 cent upside limit, setting an all-time high, early
on Wednesday and stayed there until the close as mills rushed
to fix prices on cotton bought on-call before the upcoming
delivery date for March futures.

Because Monday is U.S. President's Day, delivery notices
for the March cotton contract will be issued on Friday
afternoon for Tuesday delivery, forcing many mills who
purchased cotton on call to fix prices by then, brokers said.

Benchmark March cotton on ICE Futures U.S. finished
at $1.9702 cents a lb., up 7 cents, or 3.68 percent. May, July
and October contracts all also ended at their 7 cent limits.

Synthetic values, derived from moves on the options market,
showed May futures got as high at $2.0193 per lb, easing to
about $2.00 by the close, suggesting prices will keep rising.

Tuesday is first notice day, but with Monday's holiday,
notices of deliveries will be issued Friday.

'That's what's driving this thing. They're running out of
clock. The mills have been in denial since 90 cents, buying
when they don't believe the price,' said Jobe Moss of MCM Inc
in Lubbock, Texas.

Now, however, the mills are being forced to reckon with the
historic highs, because few merchants, who must pay carrying
costs on the cotton, have been willing to let the mills
continue rolling to a futures month, he said.

Many mills waited to fix prices, betting they would fall
from record levels. Instead, they have continue to climb as
U.S. supplies dwindle.

'There are a lot of bales on call. And if you look at May
and July there is a tremendous amount bought basis those months
too,' said Moss, adding that accelerated prices gains will
likely occur again when May and July contracts expire.

'A lot of this March has been rolled to May, as mills look
for more time,' Moss added.

With synthetic values in the options market rising to
levels above $2.0 a lb, brokers said futures prices will likely
reach those levels by the overnight session.

An ICE Futures spokesman said, cotton options nearly
reached their 14 cent limit. Once cotton prices surpassed $1.70
a lb, the ICE exchange revised its maximum limit for futures
price moves to 7 cents up or down. The move in options is
limited to double the futures price limit.

'So many people were hung in the March contract that they
were forced to run over and do something in options. This is
the epitome of a panic blow off,' said Mike Stevens, an
independent cotton analyst in Mandeville, Louisiana.

To see the ICE Synthetic Values report click:
https://www.theice.com/publicdocs/futures_us_reports/cotton/Cotton%20No%202%20Synthetic%20Report_Feb16.pdf

Late in the day, ICE Futures raised cotton margins by 16.67
percent for speculators to $8,400 and for hedgers to $6,000.

Until last Friday, prices had never surpassed the $1.89
level reached during the U.S. Civil War during the 1860s.

Analysts said scarce supplies have been driving the current
rally as demand heats up. Most U.S. cotton has already been
harvested and the pace of U.S. cotton export sales continues to
run hot.

A survey by Reuters showed brokers estimate another round
of healthy export sales at 275,000 running bales will be
reported by the USDA on Thursday morning.

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