* Traders liquidate positions in nearby contracts
* July/December spread again narrows from 2-1/2-year highs
* ICAC raises world inventories forecast
NEW YORK, April 1 (Reuters) - Cotton futures sank on Tuesday as traders worried about increasing supplies in the United States, the world’s top exporter, and waning demand.
The most-active May cotton contract on ICE Futures U.S. settled down 1.45 cents, or 1.6 percent, at 92.07 cents a lb.
“We’re seeing a reaction to the USDA acreage report and liquidation out of the May (contract),” said John Flanagan of Flanagan Trading Corp in North Carolina.
The U.S. Agriculture Department (USDA) forecast on Monday that U.S. farmers would boost acres in the 2014/15 season by 7 percent from the current season through end-July.
“There’s time to discourage extra acres, but prices need to get down further to do that,” Flanagan said.
The spread between the current crop, represented by July prices, and the new crop, represented by the December contract, narrowed for a second session.
July’s premium against December ticked down to 12.63 cents a lb from 13.55 cents previously. It hit 13.68 cents a lb on Friday, the highest such premium since June 2011, and was taken as evidence of tight nearby supplies.
Dealers were waiting for a weekly U.S. government export report due on Thursday to see if there are signs that a recent price runup to two-year highs has hurt demand.
Front-month cotton prices rallied by more than 10 percent in the first quarter of 2014, their strongest quarterly gain in a year.
In its monthly outlook on Tuesday, the International Cotton Advisory Committee (ICAC) said that next season’s inventories would swell by more 21 million tonnes as global production outstrips demand.
Global supplies have grown due to back-to-back surplus years and a government stockpiling program in top consumer China. Beijing’s reserves are estimated at 12.8 million tonnes, the ICAC said.
Uzbekistan, a major supplier to Turkey, is expected to produce 4.45 million 480-lb bales this season, down slightly from the previous year, according to the USDA attache. (Reporting by Chris Prentice; Editing by Peter Galloway)