By Rene Pastor

NEW YORK, Oct 26 (Reuters) - U.S. cotton futures surged on
Tuesday, hitting a record high and ending nearly 4 percent
higher on frenetic buying by mills, speculators and funds,
analysts said.

After a fifth straight session of gains, Lou Barbera,
cotton analyst at brokerage VIP Commodities, said cotton was
'over-inflated.' He predicted prices would drop in the days
ahead as investment funds started rolling positions out of the
December contract.

'We're up here in la-la land, in the stratosphere,' said
Mike Stevens, an independent cotton analyst in Louisiana.
'You've still got the same fundamentals going.'

Cotton prices have soared nearly 80 percent in value since
late July, rocketing up due to strong demand and higher fiber
prices in China, the No. 1 producer which has been squeezed by
tight stocks and shrinking production.

ICE Futures U.S. key December cotton contract gained
4.88 cents or nearly 4 percent to finish at $1.2959 per lb.
Before a late bout of profit taking, cotton touched a record
high at $1.305.

After the biggest five-day rise for U.S. cotton futures
since March 2003, many believe the market is overbought.

(Graphic: http://link.reuters.com/duz32q )

'It's out of control,' said Jobe Moss, an analyst for
brokers and merchants MCM Inc in Lubbock, Texas.

In China, the Zhengzhou Commodity Exchange's benchmark
fourth-month cotton contract last traded at 27,135 yuan
per tonne, having touched an all-time top of 27,980 yuan.

Analysts said U.S. and Chinese cotton prices are boosted by
the fact the Cotlook A Index ( http://www.cotlook.com ) is at a
huge premium compared to ICE Futures U.S. cotton prices.

Put together by influential industry publication Cotlook,
the A Index was quoted on Tuesday at $1.412. The Index is the
average of the five cheapest cotton prices, including
transporation.

Normally, the A Index would run at a premium of 6 to 8
cents over U.S. cotton prices. The premium is now over 15
cents, which Stevens said puts a lot of pressure on prices to
move higher.

Traders said mills were forced to pay up to secure supplies
of cotton bought on call, without fixing the price.
Chinese analysts said cotton futures were overvalued and
the market's fundamentals were incapable of supporting such
surges.

'Cotton price gains on the physical market have failed to
keep up with the gains on futures, and there will be great
risks if traders keep pushing futures prices higher,' said Li
Panfeng, an analyst with Bette Futures.

The market will watch closely to see if the pace of buying
by China has slowed down given the record run-up in prices.