* ICE cotton rises the most since late March
* December contract's 14-day RSI jumps to 39.3
* Producer selling dries up as prices hover near multi-year lows
By Chris Prentice
NEW YORK, Aug 13 (Reuters) - Cotton futures jumped on Wednesday, as a combination of short-covering and mill buying fueled the biggest daily gain since March.
The benchmark December cotton contract on ICE Futures U.S. closed up 1.35 cents, or 2.1 percent, at 64.72 cents a lb.
The previous session, the contract tumbled after the U.S. Agriculture Department (USDA) lifted its forecast for U.S. production to the high end of industry expectations.
Early on Wednesday, mill buying buoyed prices. That sign of strength prompted investors to cover short positions as volumes picked up. Benchmark prices jumped as much as 3 percent.
This month, prices have tumbled as low as 62.02 cents a lb, their lowest in nearly five years, as speculators built a large bearish stance and U.S. farmers looked likely to harvest a bumper crop due to favorable weather earlier in the growing season.
However, traders and farmers have cautioned that rains over the last week in Texas have been sporadic and dry weather could stress crops in the top-producing state.
"Short (sellers) got ahead of themselves and now are taking some profit in light of risks," said Christopher Narayanan, director and head of agricultural commodities research at Societe Generale.
Noncommercial dealers hiked their bearish stance in cotton futures and options to the highest level since 2007, the most recent U.S. government data showed.
Further adding support, U.S. farmers have ceased selling as prices have sunk nearer to U.S. government support levels, dealers said.
The day's jump pulled prices from technically oversold territory. The December contract's 14-day relative strength index jumped to 39.3 from 28.7 previously.
Exchange inventories continued their sharp decline from July's near one-year highs. They dropped to 93,972 bales on Tuesday from 95,718 bales previously, the most recent ICE data showed. (Reporting by Chris Prentice; Editing by David Gregorio)
