SOFTS-Arabica coffee steadies, digests gains

* I.Coast cocoa arrivals pick up

* Sugar producers seen selling above 19.70 cents

(Adds details, quotes, updates prices)

LONDON, Jan 3 (Reuters) - Arabica coffee futures on ICE steadied on Thursday, digesting recent gains, as dealers noted potential for further upside if investors who are short of the market covered positions.

Cocoa prices were little changed as arrivals at ports in top producer Ivory Coast picked up, while raw sugar prices were lower.

Arabica futures held onto recent gains following the previous session's rally, when buying across the commodity complex after the U.S. struck a deal to avoid a fiscal crisis helped trigger short-covering in coffee.

Dealers and analysts said the historically large net short position in arabica coffee, which stood at 34,110 lots at Dec 24., according to U.S. Commodity Futures Trading Commission data, made the market vulnerable to further short covering.

"There's a point at which the gross short position in the arabica market either needs to potentially expand further to push prices lower and encourage demand, or it needs to pare back," said Keith Flury, analyst at Rabobank.

"The idea that it's going to sit at that kind of level for months to come is unlikely."

Benchmark May arabica futures traded up 1.25 cent or 0.8 percent at $1.5340 per lb at 1142 GMT.

A wide variation between estimates for top producer Brazil's coming crop could also cause concern for investors who are short of the market and trigger the closing out of positions, Flury added.

March robusta coffee futures were up $23 or 1.2 percent at a seven-week high of $1,965 a tonne.

COCOA ARRIVALS PICKUP

Cocoa prices were steady as the volume of cocoa arriving at ports in top grower Ivory Coast increased on the week and the country's weather conditions remained favourable for the development of the mid crop.

"The arrival numbers were pretty good, the crop itself is less of a worry than it was last quarter and the new system in the Ivory Coast is certainly less of a worry," said Rabobank's Flury.

Exporters estimated around 70,000 tonnes of beans were delivered to Ivory Coast's two ports between Dec. 24 and Dec. 30, up from 66,000 tonnes the previous week.

ICE March cocoa futures were unchanged at $2,259 per tonne.

Ivory Coast expects its cocoa output to dip 13 percent this season to 1.289 million tonnes due mainly to a lack of investment in ageing plantations, a top official at the Coffee and Cocoa Council said in an interview on Thursday.

On the demand side, the cocoa market awaited the fourth quarter cocoa grinding data, due mid-January.

"I think what a lot of people are interested in is the demand - the market could be in a 100,000 tonne deficit or it could be flat this year, very much depending on the profitability of (cocoa) grinders," said Flury.

Liffe May cocoa futures traded up 5 pounds or 0.4 percent at 1,443 pounds per tonne, above the previous sessions eight-and-a-half month low of 1,429 pounds.

Raw sugar futures edged lower, consolidating under a one-month high hit the previous session, with the higher prices expected to attract further producer selling.

March raw sugar futures on ICE traded down 0.12 cent or 0.6 percent at 19.57 cents per lb.

"There was a lot of producer pricing yesterday," said a London-based broker.

"If it gets up into the 19.70s there will be selling again," said the broker, adding major producers including Brazil and Thailand were well behind in their sales.

March white sugar on Liffe eased $2.20 or 0.4 percent to $526.20 per tonne.

(Reporting by Sarah McFarlane; Editing by Alison Birrane)