SOFTS-ICE sugar soars 3 pct after dipping to a 2-1/2 year low
* Small delivery expected against March raw sugar on ICE
* March raws discount to May narrows sharply in rally
* Arabica coffee prices fall as surplus supplies weigh
(New throughout, updates prices; adds second byline/dateline, analyst comment)
NEW YORK/LONDON, Feb 28 (Reuters) - ICE raw sugar March futures dipped to a 2-1/2 year low on Thursday but then surged 3 percent on a flurry of investor short-covering after the market flew above recent session highs, causing its discount to May to narrow sharply just ahead of its expiry.
Arabica coffee, which continued to face pressure from excess supplies inched lower, defying the firm move on the Thomson Reuters-Jefferies CRB index. Cocoa futures rose on both ICE Futures U.S. and Liffe.
Dealers noted a small delivery was expected against March raw sugar futures with little appetite to receive a commodity that remains over supplied as a third consecutive global surplus is widely forecast for the 2012/13 season.
Open interest on March fell around 45 percent overnight to 7,065 lots and the front month widened to a discount to May <SB-1=R> of 0.38 cent intraday. The day's surge then caused the spread to narrow sharply to around a 0.02 cent discount, a sharp contrast compared with a premium of around 0.30 cent at one stage last week.
"We suspect delivery will be small," Nick Penney of Sucden Financial said in a market note.
March raws rose 0.58 cent, or 3.3 percent, to 18.42 cents a lb by 12:31 p.m. EST (1731 GMT), after earlier slipping to 17.61 cents, the lowest price for the front month since August 2010. The contract will expire at the end of the session.
Dealers said lower sugar prices were helping uncover demand on the physical market.
The most-active May contract also soared, rising 0.36 cent, or 2 percent, to 18.44 cents per lb, after climbing as high as 18.59 cents.
"There is some crop stress going on in parts of Brazil, particularly northeastern Brazil, that keeps a little bid under the market," said Sterling Smith, a futures specialist with Citigroup in Chicago.
A relatively small cane producing region has experienced drought this season and cane output is forecast to fall slightly.
The May contract was developing some support at 18 cents, Smith said.
"Brazilian export figures were a record in the fourth quarter versus the same period in previous years and are going to be a record in the first quarter. This shows current prices are continuing to stimulate strong demand," said Peter de Klerk, an analyst at Czarnikow.
Brazil exported 1.73 million tonnes of raw sugar and 567,100 tonnes of white sugar in January.
Producer selling above the market was expected to limit any moves to the upside, with dealers noting potential interest above the 18.50 cent level.
May white sugar on Liffe rose $4.90, or 1 percent, to $518.30 a tonne.
BUMPER BRAZIL ARABICA CROP
In arabica coffee, dealers said another bumper harvest from Brazil expected in the coming months continued to exert downward pressure on prices, despite the coffee growers' strike in Colombia and fungus outbreak in Central America.
"There's still a lot of arabica around, Brazil is still sitting on a lot," said a London-based broker.
ICE May arabica coffee inched down 0.10 cent, or 0.1 percent, to $1.4335 per lb.
Robusta prices were little changed as the market continued to be underpinned by the current slow pace of Vietnamese sales. May robustas on Liffe rose a marginal $10, or 0.5 percent, to $2,108 a tonne.
Indonesian robustas fetched smaller premiums this week with more beans expected to arrive from plantations, while worries about dry weather pushed up the price of Vietnamese coffee, dealers said on Thursday.
Cocoa prices were under pressure from lagging origin sales, and with industry already well covered, dealers said it was difficult to see a sustained rise in prices in the short-term. The markets turned higher around the time of the settlement windows, attracting a surge of volume, though both Liffe and ICE markets remained rangebound.
May cocoa on Liffe turned higher to close up 3 pounds, or 0.2 percent, to settle at 1,429 pounds a tonne.
"We're hearing origin have been unable to sell into the market because trade are not willing to pay up at the levels they are looking for, and trade appear to be in no desperate rush to buy," said Justin Grandison, head of cocoa brokerage at ABN Amro Markets.
"The same can be said for industry who have healthy fixed forward cover."
May cocoa futures on ICE finished up $4, or 0.2 percent, at $2,135 per tonne.
(Additional reporting by Nigel Hunt and Natalie Huet in London, Chris Prentice in New York; Editing by Alison Birrane and Grant McCool)