SOFTS-ICE sugar, arabica coffee reverse gains to end lower
* Sugar, coffee prone to short-covering rallies: dealers, analysts
March-May ICE raw sugar spread moves to discount
* Dry weather poses threat to cocoa mid-crops in West Africa
(Updates closing sugar, coffee prices; adds comment)
By Chris Prentice and Nigel Hunt
NEW YORK/LONDON, Feb 25 (Reuters) - ICE raw sugar futures fell on Monday after a global supply glut and weaker financial markets checked an early rally, while arabica coffee likewise retreated after touching a two-week high.
March raw sugar futures on ICE Futures U.S. were down 0.23 cent, or 1.3 percent, to settle at 18.01 cents per lb.
The most-active May contract slid 0.06 cent, or 0.3 percent, to close at 18.09 cents a lb.
Trading volumes were heavy at more than 153,000 contracts, compared with a 30-day average of under 89,000, according to preliminary Thomson Reuters data.
"At these prices, risks are more likely to be on the upside, rather than downside, and funds may want to start covering their shorts," Macquarie Capital analyst Kona Haque said in a research note.
A record speculative short position in ICE sugar meant the market was susceptible to short-covering rallies, dealers said. Speculators raised their net short positions in sugar contracts on ICE Futures U.S. to record highs in the week to Feb. 19, U.S. Commodity Futures Trading Commission data showed on Friday.
"The commitments report shows the funds just keep piling on the shorts and that helped give the market a mild boost" in the morning, said Michael McDougall, senior vice president at Newedge USA.
Still, abundant supplies, especially from top-producer Brazil which is expected to reap a bumper crop from favorable weather, and falling external markets sapped upward momentum. Equities fell on Monday on concerns that a divided Italian parliament could threaten euro zone stability.
A "flight for safety" contributed to the reversal in raw sugar prices in afternoon trading, McDougall said.
Front month March raw sugar on ICE slipped to a discount of 0.08 cent a lb to the May <SB-1=R> contract, well below a peak of a premium of about 30 points last week, which was the widest premium the spot contract held to the second-month since July 2012.
The March contract is due to expire on Thursday and the weakness of the spread might show reduced appetite for taking delivery, Nick Penney of brokers Sucden Financial said in a market update.
May white sugar on Liffe finished unchanged at $505.50 a tonne.
Arabica coffee futures on ICE fell after earlier trading higher.
Dealers said the market was underpinned by concerns about a severe outbreak of roya leaf rust disease in Central America although a favorable crop outlook in top grower Brazil should ensure adequate supplies.
"While the problems in Central America continue to be a serious threat for next season's production, positive production developments elsewhere are countering this," Macquarie's Haque said.
May arabica coffee futures on ICE settled down 0.7 cent, or 0.5 percent, at $1.431 per lb.
Earlier, ICE arabica reached $1.4445 a lb, the highest price since Feb. 13. During the past two weeks, the contract dipped to $1.3760, the lowest level for the second month since June 2010.
A strike launched by coffee growers in Colombia, one of the world's top producers, failed to bolster arabica prices. A global surplus was seen as outweighing any potential supply concerns.
Like ICE raw sugar, ICE arabica futures were seen as susceptible to a short-covering rally, due to a record net short held by speculators.
"This market has been looking for a solid short-covering rally. I'm not convinced we have seen more than a small percentage of the covering we could expect," said Hector Galvan, a senior market strategist for RJO Futures in Chicago.
May robusta coffee futures on Liffe fell $8, or 0.4 percent, to close at $2,079 a tonne.
Dealers pointed to a slowdown in robusta coffee exports from top producer Vietnam this month, although cumulative volumes for the first two months of this year are a marginal 1.5 percent below year-ago levels.
Cocoa futures were slightly higher as the market kept a close watch on the outlook for coming West Africa mid-crops.
A relentlessly harsh dry season across Ivory Coast's main growing regions is affecting bean quality and threatens to delay early harvesting of the April-to-September mid-crop, farmers and analysts said last week.
May cocoa futures on ICE rose $4, or 0.2 percent, to close at $2,143 per tonne, while May cocoa on Liffe settled up 9 pounds, or 0.6 percent, at 1,443 pounds a tonne.
(Reporting By Chris Prentice; Editing by Nick Zieminski and Alden Bentley)