* July, Dec cotton fall as investors return to fundamentals
* July may come up short during delivery period
* Dec plagued by forecast for huge ending stocks next year

NEW YORK, June 8 (Reuters) - U.S. cotton futures finished
lower on Friday, caught in broad commodity market selling, but
also as buyers who had driven prices up to their trading limit
in the last two days reviewed some bearish fundamentals to
rethink their strategies.
Cotton's short-term price volatility has mostly been
dominated by speculative traders, many of whom had been
increasing short positions throughout May, when prices fell
about 20 percent.
But with a rebound in sentiment across the commodity
spectrum earlier this week, cotton benefited as speculative
players covered those short positions and drove prices to their
4-cent daily limit two days in a row.
(See graphic: http://graphics.thomsonreuters.com/gfx1/JLE_20120806170611.jpg )
"When people say risk on, risk off, it's really fear on,
fear off as they try to figure out what's happening with the
European debt situation. That's what we're dealing with right
now," said Ron Lawson, managing director of logicadvisors.com.
The dollar's gain on the euro pressured dollar-denominated
cotton along with other commodity prices. The euro took a
battering after a three-notch cut to Spain's credit rating on
Thursday and signs of weakness in Italy and Germany.
Benchmark December cotton on ICE Futures U.S. slipped
2.4 cents, or 3.32 percent, to end at 69.88 cents per lb. The
trading range spanned 68.70 to 71.97 cents per lb.
December's contract volume was large at 29,367 lots, due in
part to rollovers into December futures and out of July.
Spot July cotton closed at 72.90 cents a lb, down 99
cent, or 1.34 percent, on robust volume of 25,739 lots.
After two days of steep rallies, cotton prices weakened as
market fundamentals kicked back in along with the influence of
European worries. December finished with an inside trading
session -- meaning a lower high and a higher low -- and July
futures with a more modest decline.
July cotton, which marks the last of the 2011/2012
marketing-year crop, looks like it may come up short and the new
2012/2013 crop year is projected to end in a surplus.
"For July, we're in a situation where we've already exceeded
the export sales the USDA (U.S. Department of Agriculture) says
we will make," Lawson said.
He said a case could be made that there will be insufficient
cotton to satisfy the July contract deliveries, though he
cautioned that scenario may not become reality.
"Conversely," he said, "December is facing one of the
biggest carry-outs of the new crop that we've ever seen."
The USDA is predicting a surplus of 73 million bales by the
end of the 2012/2013 crop year, one of the largest ever.
Cotton market participants will be keenly watching the
USDA's monthly supply/demand report on Tuesday to see whether
that carry-out figure will be downwardly revised. If not,
December futures could suffer heavy losses again.
Late on Friday, the U.S. Commodity Futures Trading
Commission reported that ICE cotton speculators trimmed net
short positions by 227 contracts to 3,783 in the week ended June
5.
Given that much of the week's short-cover buying occurred on
Tuesday and Wednesday, that number will likely be much larger
next week.
Elsewhere, forecasters said they see fewer storms for this
year's Atlantic hurricane season, as well as a 50 percent chance
El Nino will strike this year.
Open interest, a reading of investor interest, slipped on
Thursday by 119 to 203,115 lots from 203,234 on June 6. It
remained near last week's highest level since Feb. 10, 2011.
Friday's volume came to a lofty 58,869 lots, about 138
percent more than the 30-day average, and followed 64,040 lots
on Thursday, Thomson Reuters data showed.