SOFTS-Coffee soars on Brazil drought fears, sugar at 4-month peak

* Arabica coffee nears 2-year high

* Raw sugar rises in overbought territory

* Cocoa moves sideways, underpinned by firm demand

(New through, updates prices; adds trade comment, second byline, NEW YORK dateline)

NEW YORK/LONDON, March 5 (Reuters) - Arabica coffee futures surged on heavy investor buying on Wednesday, nearing a two-year high as concern about crop damage from a drought in top grower Brazil continued to fuel the volatile market, while raw sugar jumped to a four-month high.

Cocoa on ICE Futures U.S. and Liffe were firm.

ICE second-month arabica futures were up 8.25 cents, or 4.5 percent, at $1.9370 per lb by 12:43 p.m. EST (1743 GMT).

Investor buying poured into the volatile market, which just saw its biggest monthly gain in nearly 20 years in February and is by far the strongest 2014 performer on the Thomson Reuters/CoreCommodity CRB Index, pushing it near Monday's two-year high at $1.9780 per lb.

Christian Wolthers, of Florida-based coffee importer Wolthers Douque, forecast in a morning report that Brazil's upcoming 2014/15 crop will reach 47.7 million 60-kg bags "at best", due to drought damage. He projected that 2015/16 will produce only 40-42 million bags due to lower branch growth and less fruit production.

"When we look at Brazil in the next harvest year (2014/15), we could be in a higher price structure," said Edward Bell, a senior commodities analyst at the Economist Intelligence Unit (EIU)

Arabica coffee prices have surged 70 percent so far this year, fueled by concerns over the crop impact of the unseasonably dry weather in Brazil. Weather forecasts were not promising. Though Maryland-based MDA Weather Services called for heavy rains this week in Parana, Sao Paulo and southwestern Minas Gerais, it forecast that drier weather in northern and eastern Minas Gerais, Espirito Santo and Bahia next week will increase dryness there.

Coffee futures markets are carefully tracking Brazilian weather reports and data gauging the extent of damage to crops.

Second-month Liffe robusta coffee was down $13, or 0.6 percent, at $2,064 per tonne. The diverging movement lifted arabica's premium over robusta <KC-LRC=R> for the fourth straight session to 96 cents per lb, the highest since April 2012.

In sugar, concerns about drought damage in Brazil, also the top grower of the sweetener, helped raise it to a four-month high.

May raw sugar on ICE was up 0.49 cent, or 2.8 percent, at 18.23 cents a lb, after touching a four-month peak of 18.26 cents a lb.

"On the charts, there is a potential bull flag building up, and although it is technically in overbought territory, consistent buying on any dip may persuade players that another leg up is imminent," said Nick Penney, a senior trader with broker Sucden Financial Sugar.

Total open interest in raw sugar dropped on Tuesday for the sevenths straight session, easing by more than 3,900 lots to 787,953 lots, the lowest since Dec. 4, exchange data showed.

May white sugar futures on Liffe rose $8.90, or 1.9 percent, to $485.40 per tonne.

ICE May cocoa futures settled up $14, or 0.5 percent, at $2,970 per tonne, underpinned by expectations of a global deficit and firm demand. May cocoa futures on Liffe rose 5 pounds, or 0.3 percent, to close at 1,849 pounds.

"The general uptrend is still intact. The funds have been holding onto their longs, a London-based broker said.

(Editing by Jane Baird and Marguerita Choy)