* ICE inventories increase to highest since August
* Market moves into contango for first time in four months
* Rising stocks stoke worry over canceled orders
By Chris Prentice
NEW YORK, Oct 11 (Reuters) - Cotton exchange stocks roselast week to the highest since August, returning the market to acontango for the first time in four months and quelling concernsabout dwindling supplies as U.S. traders await the late arrivalof the 2013/14 crop.
Even so, the sudden injection of supplies has reignitedconcern over canceled orders and faltering demand for cotton,which has faced growing competition from lower-priced, syntheticfibers in recent years.
Certified stocks rose to more than 24,300 bales by Friday,with another 35,700 bales awaiting review by the U.S. Departmentof Agriculture, the most recent IntercontinentalExchange datashowed on Monday.
That has lifted available inventories by about 11,500 balesin one week to the highest since August and is the first sign ofa significant return of supplies since exchange stocks fellprecipitously from nearly 623,900 bales in early July, datacompiled by Reuters show.
"Rumor has it that this inventory will grow to at least150,000 to 200,000 bales over the coming weeks," Peter Egli,director of risk management for British cotton merchant PlexusCotton Ltd, said in a report.
As of early October, total exchange inventories had plungedto 11,900 bales, the lowest since November 2012.
This summer's steep drop in exchange inventories wasparticularly troublesome for the cotton trade, as the U.S. cropis expected to be the smallest in four years and late because ofunfavorable weather.
The sudden arrival of the bales returned the market to acontango last week for the first time in four months, making itless costly for merchants and users to pay the cost ofwarehousing, or carrying, the cotton.
"You probably could hear the collective sigh of relief fromthe trade as that happened," said a U.S. trader.
The December contract on ICE Futures U.S. traded at adiscount of 0.95 cent a lb to the March, up from 0.85cent a lb on Friday and a premium of 0.05 cent the previousweek.
The December contract had been trading at a premiumto March since June, as concerns built over upcomingsupplies in the United States, the world's top exporter, and asa certified stocks fell steeply following a large July ICEdelivery.
CANCELLATIONS, MISSING DATA
The bulk of the climbing inventories are expected to becotton from the 2012/13 crop year, ended July 30, as harvestingof the new crop is just now under way, traders said.
At least a portion is expected to be supplies thatSwitzerland's Glencore Xstrata Plc bought this summerthrough the July exchange delivery and purchases in the cashmarket. A spokesman for the company declined to comment.
The rise is being taken by many as a signal of ordercancellations, as any buyer of cotton has to have sales bookedto take bales from the exchange stocks, per the CommodityFutures Exchange Commission's hedging exemption rule.
Bales can be returned to the exchange if there are canceledorders, if fiber from elsewhere is substituted, and if thecotton does not meet the quality of a commercial sale.
Talk of cancellations has led to renewed worry about slowingdemand and ballooning global supplies.
"We're not seeing demand for these," said the U.S. trader."If there was demand, you wouldn't see this in the certifiedstock."
Recently, high prices above 84 cents a lb have dampedbuying, particularly in top consumer China, where the governmentis considering overhauling its stockpiling program, which has driven voracious demand for imports.
Without weekly U.S. export data from the USDA because of thegovernment shutdown, cancellations have become guesswork for thetrade.
Traders have missed two weeks of the U.S. export sales data,used as an indicator of export demand. On Friday, they had tocope without the monthly supply and demand report.
"We don't know what kind of export volumes we're doing, andwe don't have a crop condition report. There's a lot that'suncertain right now," said Jobe Moss, a broker with MCM Inc. inLubbock, Texas.
"But there's just way too much cotton. The climbing stocksare telling us the new direction is probably going to be downfor this market."