SOFTS-Coffee falls on profit-taking, arbitrage in cocoa

* Focus on unseasonal rains in top cocoa grower Ivory Coast * Tightening supplies seen in sugar - trade (Adds trader comment, updates prices)

By David Brough

LONDON, Jan 7 (Reuters) - Coffee futures fell on profit-taking in light volumes on Wednesday after a rally on Tuesday, while cocoa rose on arbitrage driven by a weak dollar and sugar was little changed in two-way investor dealings.

Coffee prices were lower as the market slipped back slightly after Tuesday's strong advance.

March arabica futures on ICE were off 0.45 cents at $1.1565 per lb at 1314 GMT. The contract soared 8.40 cents or 7.8 percent on Tuesday to close at $1.1610 per lb, the highest close since November 28. "Today the market is consolidating a little bit. It is just doing exactly what it should do, taking a rest to get more fuel and more momentum on the upside," one dealer said.

Dealers said light profit-taking weighed on prices.

Robusta coffee futures in London were also lower with March down $21 or 1.3 percent at $1,652 a tonne. The contract rose $103 or 6.9 percent on Tuesday.

Dealers said the premium for January had risen to more than $300, boosted by concern about whether sufficient tenderable supplies will be available to deliver against the still large open position.

There were just 104 lots graded on Tuesday, bringing this month's tenderable total to 240 lots, according to exchange data. The open position on January remains above 15,000 lots.

"I think people are very concerned about gradings," one dealer said, adding, however, that the pace may pick up around the middle of this month.

January was off $5 at $1,945 a tonne.

Cocoa rose in a market dominated by arbitrage dealings, dealers said.

"It's all to do with the weak dollar driving New York higher," one London cocoa dealer said.

ICE March cocoa was up $54 or 2.1 percent to $2,622 per tonne at 1321 GMT, while London May cocoa was up $10 or 0.6 percent to 1,779 pounds per tonne.

Market fundamentals were constructive as attention focused on the pace of bean arrivals to West African ports and a weak pound before a likely chunky UK rate cut on Thursday.

Dealers said the pace of bean arrivals had picked up lately after a slow start last year, and attention focused on unseasonal rains in top producer Ivory Coast, which augured well for the development of a crop that has so far disappointed.

Cocoa arrivals at ports in top producer Ivory Coast were 530,000-550,000 tonnes between Oct. 1 and Dec. 31 2008, compared with 800,000 tonnes in the same period of the previous year, the sector chief said on Wednesday.

Many traders believe that 2008/09 will be another global deficit year for cocoa.

Sugar futures were little changed in two-way investor dealings, erasing earlier losses as the dollar weakened against the euro.

Dealers said the market for the sweetener appeared to be tightening due to pressure on supplies, signalling higher prices in the medium term.

ICE March raw sugar futures were down 0.05 cent or 0.4 percent to 12.22 cents per lb at 1319 GMT.

Dealers pinpointed nearby resistance at 12.50 cents per lb.

London March white sugar was up 60 cents or 0.2 percent to $336.00 per tonne.

The sharp drop in crude oil prices and the global financial crisis is set to disrupt the development of biofuels in the European Union, a top European Commission official said on Tuesday. (Additional reporting by Nigel Hunt in London.) (Reporting by David Brough; editing by William Hardy)