* Most long-staple cotton last year was fake
* Devaluation and labelling scandal revive interest
* Seed standards imposed to drive up quality
By Arwa Gaballa and Eric Knecht
CAIRO, Feb 13 (Reuters) - Egypt's most famous export, the silky soft cotton prized by makers of luxury bedding and clothing, has become so scarce as production has fallen that most supplies sold under its brand name last year were fake.
But a surge in local cotton prices ahead of next month's planting season, and a crackdown on ersatz Egyptian cotton worldwide, are reviving interest in cultivating the long-neglected crop.
Farmers, spinners, and exporters say the weakness of the Egyptian pound following its flotation in November and a scandal over the alleged sale of falsely labelled Egyptian cotton have increased demand for the real thing, injecting life into a historic industry on its deathbed.
Egyptian cotton output will be "between double and triple this year," said Ahmed Elbosaty, chairman of Modern Nile Cotton, a major cotton trading company.
Last year, agricultural production of Egypt's high quality long-staple cotton hit a more than 100-year low.
Production has slumped since 2011, a year of political upheaval that coincided with looser regulations that degraded the quality of local cotton, said Nabil al-Santaricy, head of the Alexandria Cotton Exporters Association.
Faced with big losses, farmers burned their cotton crops, with many switching to rice.
In a bid to save its historic crop, Egypt in 2016 banned all but the highest quality cotton seed, dramatically shrinking the area under cultivation but restoring quality.
The U.S. Department of Agriculture estimates that in 2016-17 Egypt will produce 160,000 bales, half the previous year's crop and a fraction of the 1.4 million produced in 2004-05.
With global stocks low, some foreign suppliers have mixed lower grade lint into yarns and fabrics, passing them off as Egyptian cotton, spinners and exporters said.
The Cotton Egypt Association, which provides an official logo to suppliers of 100 percent Egyptian cotton, estimates that about 90 percent of global supplies of Egyptian cotton last year were fake.
"When the manufacturer can write it's 100 percent Egyptian cotton, and everyone else does the same, why would he buy the actual Egyptian cotton?" said association head Khaled Schuman.
The scandal hit the headlines last year when U.S. retail chain Target Corp accused Indian textile manufacturer Welspun India of using cheaper, non-Egyptian cotton in sheets and pillowcases.
Retailers began reviewing whether to stop selling Welspun products and demanded that those offering 100 percent Egyptian cotton should show proof.
"This whole thing revived interest in Egyptian cotton and increased demand," Santaricy said.
Schuman said his association had received an "enormous number" of requests to use its logo, which guarantees quality, since the Welspun affair, with 20 companies signed up since December.
"There's now more focus on selecting suppliers who use 100 percent Egyptian cotton ... Companies are telling us that 'we are required to get your license because we cannot sell our product without it'," he said.
Following the scandal, Welspun, one of the world's largest textile manufacturers, announced an investigation into its supply processes.
The company said last Thursday that the Cotton Egypt Association had granted it the right to use its logo through 2022 following a review of its supply chain. Welspun said it now plans to invest $3 million to market Egyptian cotton worldwide and may open a plant in Egypt.
"We foresee an increase in demand for Egyptian cotton and find an ideal condition for making Egypt one of our hubs for sourcing and manufacturing Egyptian cotton products," Welspun said.
Schuman says measures such as DNA testing and a system of international auditing will reduce imitation Egyptian cotton to 30 percent of world supply by the end of this year.
Exporters and spinners say one of the biggest challenges is supply: there simply isn't much Egyptian cotton.
This is set to change. Farmers and exporters expect a comeback for the crop, spurred by the country's decision to float its currency, halving its value overnight but helping push local cotton prices sky high -- to about 3,200 Egyptian pounds ($174) per qintar (160 kg) from 1,200 Egyptian pounds a few months earlier.
"There was no hope in cotton until this season ... Now all the farmers are going to grow it," said Nile Delta farmer Maher Allam, who plans to quadruple his cotton area.
Egypt's sunny skies and superior seed help it grow a cotton known for unusually long fibres that produce a light durable fabric with an attractive sheen and soft touch.
Long-staple sells at 155 cents per lb, about twice the price of common short-staple cotton.
Its return to world markets could provide a lucrative export opportunity at a time when Egypt has a huge trade deficit and is seeking to relaunch its stagnant economy.
"The 2016-17 season marked the beginning of the return of Egyptian cotton ... More farmers want to plant now, because the crop has become more competitive," said farmer Waleed al-Saadany, who is doubling his cotton planting this year.
At Egyyarn, a yarn factory on the outskirts of Cairo, January was the first month its machines had run at full capacity in over a year, owing to a rise in demand.
The plant, with humidity levels set high to preserve the soft touch of its long-staple cotton, produced 150 tonnes of yarn in January, up from 110 tonnes a month earlier.
"Business was bad, but now with this new cotton, things have become different ... clients are increasing their contracts," factory manager Ahmed Hussein said over the steady swish of yarns whipping around spinning machines.
Egyyarn was among the first to procure the new high quality crop, said Hussein, prompting the return of clients who had shunned the company because of quality issues.
"Companies were going to India and Pakistan because the characteristics of Egyptian cotton were not great," said Khaled Moussa of Almatex, another yarn producer.
Moussa said increased supplies would allow the company to increase exports just as the Welspun case and a better crop drive up demand. His company hopes to nearly double its exports over the next year to 3,000 tonnes.
"The case exposed those who were bluffing and charging people for something they were not providing," he said. (Additional reporting by Zeba Siddiqui in Mumbai; editing by Giles Elgood)