A steep downtrend has tramped cotton futures to a new 27-month low under the overhang of massive world stocks and an uncertain demand outlook amid weakening economies in Europe.

Spot July lost 239 points for the holiday-shortened trading week ended Thursday to close at 71.55 cents, while December dipped a modest 32 points to settle at 70.35 cents. For the month, July plunged 17.85 cents or 20 percent and December fell 16.61 cents or 19.1 percent.

Trading turned more two-sided on Thursday as July consolidated higher after falling to 70.38 cents on Wednesday, the lowest front-month print since February 2010. July managed to close Wednesday above its prior low, seen technically as a lack for now of confirmation of a new low.

December stayed well above its contract low of 67.73 cents and low close of 68.75 cents, both set on May 23. It has fallen below 70 cents five times in the last six sessions but closed below that only once.

Aggressive grower-related hedging appeared to disappear below 70 cents, analysts said, while mills seemed more active on the buy side. Growers came into May with only 9 percent of their expected 2012 upland acreage under contract, not counting cotton consigned to marketing groups, and analysts said they have actively sought protection on futures rallies.

Only 134 bales of old-crop cotton changed hands in cash trading on The SeamΆs grower-to-business exchange, down from 2,279 bales the previous week. Prices fell to an average of 60.84 cents from 65.91 cents, reflecting a decline to 8.08 cents from 16.77 cents in premiums over loan repayment rates.

A sharp break in the July-December spread on heavy volume on Tuesday as JulyΆs open interest declined and DecemberΆs increased underscored indications that longs were exiting the front contract and that some index funds had begun rolling positions forward.

The inverted intercrop spread then traded as narrow as 50 points on follow-through activity on Wednesday — it had been as wide as 347 points just two sessions earlier — and bounced to 120 points at ThursdayΆs close.

The larger index funds had been expected to begin rolling their July holdings into December on Thursday and continue until June 11, an analyst said. This would involve buying December, selling July.

December for the first time took the lead in open interest from July going into ThursdayΆs session, a further indication that index funds already may have been moving out of July longs. Spread activity accounted for as much as 53 percent of the daily volumes.

Index funds were net long 72,215 lots in futures-options combined as of May 22, while trend-following funds and small traders were net short 6,228 lots and 2,751 lots, respectively. Commercials were net short 63,235 lots.

On the U.S. crop scene, 57 percent rated good to excellent as of last Sunday, USDA reported in its first conditions report of the season. The crop was 13 percent excellent, 44 percent good, 40 percent fair and 3 percent poor. None was rated very poor.

Cotton in good to excellent condition was four percentage points below a 10-year average, though a Dow Jones national index — 100 is approximately “normal” — came in at 101.8. The top two cotton states, Texas and Georgia, showed indexes of 102 and 100, respectively.

Squaring totaled 7 percent, only a point ahead of last year and two points above average. Texas cotton was 10 percent squaring, compared with 11 percent a year ago 9 percent on average.

Planting maintained a fast pace, advancing 14 points to 76 percent, eight points ahead of last year and six points above the five-year average. Progress lagged the average in only two states, California and North Carolina.

Mostly clear, hot conditions with temperatures climbing into the low 100-degree area facilitated rapid planting following recent rains in the West Texas Plains. Uniform stands and optimum plant development were reported in the central High Plains around Lubbock.

However, some dryland areas on the High Plains lacked moisture for germination and stand establishment, growers said. Some seedbeds have dried out. Growers in various places have been dry-planting or “dusting in” cotton — hoping for rain to bring it to a stand —to meet crop insurance requirements.

Elsewhere, recent rains brightened yield prospects in South Texas. Dryland and irrigated cotton displayed strong vigor in the Rio Grande Valley, traditional source of the nationΆs first new-crop cotton.

Meanwhile, speculators fractionally trimmed their net short futures-only position by 0.1 percentage point to 4.8 percent of the open interest during the week ended May 25 by adding a few more longs than shorts, according to the exchangeΆs spec-hedge data.

The specs owned 50.6 percent of the shorts, up 0.6-point, and 45.8 percent of the longs, up 0.7-point. They added 2,555 shorts along with 2,800 longs to shave their net shorts by 245 lots to 8,102. Their outright holdings totaled 97,052 shorts and 87,950 longs.

Commercials were relatively quiet, nudging their hedge shorts up 446 lots to 94,880 and their hedge longs up 201 lots to 103,982. Open interest increased by 3,001 lots to 191,932 and expanded to 193,425 lots going into ThursdayΆs session, about a two-month high. The latest expansion suggested new spec sellers were active on the market downswing.

In other developments, reports circulated that the Commodity Futures Trading Commission is conducting an investigation into the extremely volatile trading that roiled the cotton market a year ago.

The Financial Times reported that the CFTC has interviewed traders about happenings during the July delivery period last year, citing industry executives and companies contacted by the commission.

Initial surveillance inquiries began a year ago and are reported to have intensified. Many of the numerous investigations launched by the CFTC every year result in no formal action, sources said.