SOFTS-Sugar hits 6-month high, arabicas ease but near peak

Trade the News

Tuesday September 07, 2010 11:20:13 PM GMT

* Bad weather to trim 2010/11 sugar output

* Expectations of big Vietnam crop weigh on robustas

* Favourable W. Africa weather weighs on cocoa

(Adds trade comment, updates prices)

By David Brough

LONDON, Sept 7 (Reuters) - ICE front-month raw sugar futures extended gains to a fresh six-month peak of 21.18 cents a lb on Tuesday against a backdrop of tight supply and firm demand as the market adjusted after the U.S. Labor Day holiday.

Coffee and cocoa futures fell on investor selling, pressured by a strengthening dollar against a basket of currencies, but arabicas were still near a 13-year high touched last month.

Fresh investment fund buying gave impetus to sugar futures despite the strength of the dollar, dealers said.

The dollar climbed after a Wall Street Journal report said Europe's recent "stress tests" of major banks underestimated some lenders' holdings of potentially risky government debt.

"We're seeing a little bit of fund buying. It's more technical than fundamentally driven," said Jake Weatherall, a soft commodities trader with Rabobank in London.

"It's a pretty impressive performance considering that the dollar is stronger today."

ICE October raw sugar futures stood at 21.13 cents a lb, up 0.53 cent at 1244 GMT, having earlier hit a high of 21.18 cents, up 0.58 cent, while London October white sugar was up $4.60 at $599.80 a tonne in modest volume of 2,668 lots.

"Our next technical target basis October is 21.22 cents a lb, followed by 21.55 cents," said Nick Penney of Sucden Financial Sugar in a daily market report.

"The strength in the market is not confined to the front months as 2011 contracts have also posted new highs with July 2011 having traded 51 points up at 18.71.

"This seems to back up trade worries of a gap in supply in late 2010 and the first half of 2011. 20 cents a lb basis October now seems solid support."

Dealers noted prospects for tightening supplies and improved consumption of the sweetener, which has led some analysts to note an increased likelihood that the global sugar market will move towards equilibrium rather than surplus in 2010/11.

BRAZIL WEATHER

Prolonged dry weather in top exporter Brazil signalled weaker yields, helping to underpin prices, dealers said.

Adverse weather in countries such as Russia and Pakistan has reduced the outlook for world sugar production. Demand is expected to remain strong and even rise on the year.

Arabica coffee futures eased in a technical correction pressured by the stronger dollar, having rallied late on Friday to within hailing distance of a 13-year top.

"Volume is very thin, but currencies are pushing arabicas lower," a London-based coffee futures dealer said.

ICE December arabicas were down 3.90 cent to 183.05 cents a lb but were within sight of the 13-year peak of $1.8865 touched last month, while London November robustas were down $29 to $1,588 per tonne, pressured by the stronger dollar.

"The expected increase in the size of the crop in top producer Vietnam is very much in the market psychology. It is rather the currency that has been weighing on prices today," a London-based robusta coffee futures dealer said.

ICE benchmark cocoa futures fell slightly, having bounced on Friday to go into the weekend with upward momentum after losing ground in the previous few sessions.

London benchmark cocoa futures dipped, consolidating near 11-month lows, with upside potential capped by expectations for good-sized harvests in the main growing region of West Africa, due to favourable weather.

London second-month cocoa was down 10 pounds to 1,955 pounds, while ICE second-month cocoa was down $9 to $2,763 per tonne.

"Every time cocoa prices come off, trade comes in and buys it," one London-based cocoa futures dealer said. (Reporting by David Brough; editing by Anthony Barker)

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