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SOFTS-Coffee extends retreat as rains improve Brazil outlook

* Indonesia coffee fetches high premiums on crop concerns

* Rains in Ivory Coast may boost cocoa crop outlook

(Adds trade comment, updates prices)

LONDON, March 20 (Reuters) - Arabica coffee futures on ICE fell sharply on Thursday from last week's two-year high as rains in Brazil raised the possibility that drought-driven crop losses may not be as severe as feared.

Raw sugar and cocoa futures were also lower.

"It tends to be that in these kinds of bad weather events everyone automatically goes to your worst-case scenario but recently we've had a bit of rain and better weather," Tom Pugh, commodities economist with Capital Economics, said.

"It is looking like the damage might not be as bad as people first thought so I think that is why prices have started to fall back."

May arabica coffee futures on ICE fell more than 5 percent to a session low of $1.7580 per lb by 1425 GMT.

The front month peaked at $2.0755 last week, its highest since February 2012.

Unprecedented dryness in January and February led many to cut forecasts for production in the world's top grower and triggered a surge in prices of as much as 85 percent.

Brazil's harvest should start in May.

"When we start the harvest we will see prices fall back a bit more as people get better estimates of the actual damage," Pugh said.

May robusta coffee fell $40 or 1.9 percent to $2,050 a tonne, below last week's 17-month high of $2,218.

Vietnamese robustas traded at prices below London futures this week, while Indonesian beans still fetched high premiums on renewed concerns about weather ahead of the new harvest, dealers said on Thursday.

COCOA SETBACK

Raw sugar futures were slightly lower, with May off 0.04 cent or 0.2 percent at 17.28 cents a lb.

"It seems we are likely to continue sideways 15/20 points either side of 17.20 cents/lb for today," said Tom Kujawa, co-head of the softs department at broker Sucden Financial Sugar.

Drought in Brazil has also posed a threat to sugar output and helped to send front-month prices to a peak of 18.47 cents earlier this month, a four-month high.

Dealers said, however, recent rains have diminished concerns and brought the focus back to more-than-ample global stocks after a string of seasons in which supplies outstripped demand.

"It is exactly the same kind of story (as coffee), just less exaggerated. It went up less so it will come down less," Pugh of Capital Economics said.

Liffe May white sugar futures were off $2.10 or 0.5 percent at $457.50 per tonne in light volume of 1,224 lots.

Cocoa futures on ICE declined as the market suffered a setback after climbing to a 2-1/2-year high this week.

Dealers noted forecast rains should boost the crop outlook in top producer Ivory Coast while the market's failure to make further headway in the last couple of days may also have triggered some profit-taking.

May cocoa on ICE fell $38 or 1.3 percent to $2,987 a tonne. The contract peaked at $3,039 on Monday while attempts to rally the market on Tuesday and Wednesday stalled at $3,033 and $3,032 respectively.

Phillip Futures said in a research note that cocoa futures on ICE and Liffe still had the potential to move higher based on an analysis of price charts.

"This is in line with our bullish fundamental outlook as the cocoa market is going to experience yet another global deficit in 2013/14," the report said.

Cocoa futures on Liffe were lower, with July off 9 pounds or 0.5 percent at 1,887 pounds a tonne.

(Additional reporting by David Brough; Editing by William Hardy and Dale Hudson)