* USDA report on U.S. market points to turnaround after
surplus
* Prices rally over 3 pct after report
* U.S. cotton stocks to reach lowest since 2010/11
* Global outlook mainly unchanged

(New throughout; Adds market comment, updates prices)
NEW YORK, June 12 (Reuters) - The U.S. government on
Wednesday lowered its forecast for cotton inventory in the
United States for the upcoming season to below expectations due
to a lower-than-expected crop as drought ravages Texas, the
country's biggest producing state.
In one of its most bullish monthly cotton reports in years,
the U.S. Department of Agriculture cut its forecast for the U.S.
carryover by 400,000 bales to 2.6 million 480-lb bales, lowered
its crop forecast and increased its price forecasts for the
upcoming 2013/14 season to 15 percent from the current year.
The revised outlook sent prices on ICE Futures U.S. up over
3 percent to their highest level since April.
The surplus, known as carryover, for the season starting on
Aug. 1 would be the country's lowest in three years and is well
below industry forecasts of 3.07 million ahead of the report.

The improved outlook also marks a turnaround for the
domestic market, the world's third largest producer, which has
struggled to whittle down a big excess of stock after a surge in
output in recent years.
While the U.S. picture has brightened, the global one
remains bearish, with the USDA leaving most of its world
forecasts largely unchanged on Wednesday.
The government still expects a record global surplus and
more than 60 percent of world supplies will be held in China,
the world's largest textile industry, where the government has
been hoarding fiber for the past three years.
"Traders of all types remain confounded by the bullish U.S.
situation versus the obviously bearish world fundamentals," said
INTL FCStone analyst Andy Ryan.
Beijing's stockpiling policy remains the "big wild card" as
the government looks to make sweeping changes to head off a
potential crisis for the country's textile mills.
Until there is some some clarity over the program, the
market will be roiled by U.S. weather, he said.
In Wednesday's report, expectations that farmers in the
Southwest will abandon crops due to dry weather prompted the
government to cut its U.S. crop estimate by 500,000 bales to
13.5 million bales for the upcoming year.
That output estimate is down more than 20 percent from this
year and below industry forecasts of almost 14 million. In the
spring planting season, U.S. farmers have also switched to
higher-priced grains, data shows. The report also forecast a
drop in exports.
The USDA raised its estimate for prices for the next
marketing year by 5 cents to between 73-93 cents per lb from
last month. That would be up 15 percent from this year.
On Wednesday, cotton was the best performing commodity out
of 19 commodities in the Thomson Reuters-Jefferies CRB index
.
The most-active December contract on ICE Futures U.S.
jumped 2.89 cents, or 3.4 percent, to settle at 88.07 cents a
lb, after touching 88.18 cents a lb, the highest level since
April.
While merchants and farmers will be encouraged by the better
market conditions, the prospect of higher prices and lower
supplies will likely reignite concerns about their impact on
textile mills' appetite for raw cotton.
Most remember the roiling of 2011 when prices soared to $2.2
per lb, its highest since the U.S. Civil War in the 1860s, only
to plunge almost as quickly as demand evaporated. Mills used
more lower-priced manmade fiber instead.
Current prices are still well below those highs, but the
reasons behind the rally - China's stockpiling and crop losses
in Texas - are similar to the current market.

LESS BRIGHT GLOBAL MARKET
The outlook for the global market will likely reinforce
concerns among mills that China is tightening its grip on global
supply just as Beijing prepares to overhaul its stockpiling
policy that has underpinned prices and bolstered demand.
The USDA lowered its forecast for global inventories for the
crop year through July 2014 slightly to 92.49 million from 92.74
million in May due to reduced expectations for global output,
though that number would still represent a record level and
surpass industry expectations.
More than two-thirds of the global carryover is expected to
be held in China, where inventories will total 58.93 million
bales by the end of July 2014, the USDA said.
That is 64 percent of the global carryover in 2013/14 and up
from 58.18 million bales last month, the USDA said on Wednesday.
"This level of stocks within China is not sustainable and
the larger they grow, the more likely Beijing is to act," said
Knight Futures cotton specialist Sharon Johnson.