SOFTS-ICE cocoa at 6-mth low, raw sugar vaults on short-covering
* Speculators cut net longs in Liffe and ICE cocoa
* Producer selling may stem advance in sugar prices
* Dealers keep close watch on coffee rust in Central America
(New throughout, updates prices; adds trade comment, second byline/dateline)
NEW YORK/LONDON, Jan 28 (Reuters) - Cocoa futures on ICE eased to a seven-month low on Monday, dropping for the third straight day as the weak sterling and long liquidation pressured the market, while short-covering lifted raw sugar to a two-week high in heavy volume.
Coffee futures trading in both New York and London turned quietly lower.
Sterling weakness against the U.S. dollar weighed on cocoa trading on ICE Futures U.S. while providing light support to Liffe cocoa, though improved crop conditions in the world's biggest producer, Ivory Coast, prevented stronger gains, dealers said.
The expectation for West African selling also added some pressure.
"Ghana has a lot of selling to do for the 2013/14 crop. They're waiting for a rally to sell into but the market keeps moving away from them," one U.S. dealer said, referring to the world's second biggest producer.
March cocoa futures on ICE closed down $12, or 0.6 percent, at $2,161 per tonne, the spot contract's lowest settlement since June 2012.
Dealers noted speculators continued to reduce long positions in cocoa contracts on both ICE and Liffe as the flow of cocoa out of West Africa picks up after a slow start to the season and the outlook for mid crops improves.
"Origins are behind and they need to sell," said a London-based broker.
May cocoa on Liffe inched up 5 pounds, or 0.4 percent, to end at 1,432 pounds a tonne, underpinned by the weakness of sterling, which hit a five-month low against the dollar.
SHORT SWEET POSITION
Raw sugar futures on ICE vaulted higher in hefty volume on speculative short-covering, with dealers pointing to the large short position held by speculators.
Speculators increased their net short position in sugar to the biggest in seven years on ICE Futures U.S. in the volatile week to Jan. 22, U.S. Commodity Futures Trading Commission data showed on Friday.
"The record short on ICE has helped the market move forward," said James Kirkup, director of sugar brokerage at ABN AMRO Markets.
March raw sugar futures on ICE jumped 0.30 cent, or 1.6 percent, to 18.68 cents a lb by 12:25 p.m. (1725 GMT), paring earlier gains after reaching 18.96 cents, their highest level since Jan. 14.
"Potentially there's more to be done," said Michael McDougall, a vice president at Newedge USA, referring to the expectation for more short-covering.
McDougall also said dealers were keeping a close eye on heavy rain in Australia, the world's third-largest sugar exporter.
"The heavy rains in Australia are potentially damaging some of the cane. Last time there was flooding it closed the port," he said.
Dealers said sentiment on fundamentals remained bearish, however, with a substantial global sugar surplus widely forecast for 2012/13.
"In the medium term ... I think it will encounter producer pricing - especially as July heads towards 19 cents - we'll see the Brazilians looking to cap gains," Kirkup said.
"It's a question of how far can it go before it runs out of puff. I think we need a change in the fundamentals to get it to sustain any rally."
White sugar futures on Liffe also rose, with March up $5.90, or 1.2 percent, to $492.60 per tonne.
Arabica coffee futures on ICE moved lower on light pressure from the firm U.S. dollar and some origin selling, though losses were limited due to concern about the roya fungus in parts of Central America.
"Roya will affect more the yield and quality of next year's crop (2013/14)," said a London-based broker. "I would expect more lower qualities because it's more to do with the size of the beans."
March arabica coffee futures on ICE inched down 0.4 cents, or 0.3 percent, to $1.4790 per lb while March robusta coffee futures on Liffe eased $18, or 0.9 percent, to $1,941 a tonne.
(Additional reporting by Sarah McFarlane in London; Editing by Anthony Barker and Tim Dobbyn)