London, Oct 14 - Coffee held onto gains, while sugar and cocoa turned negative on Tuesday as the dollar strengthened, but volumes were light as investors were nervous about financial markets despite moves to recapitalise banks.
Early in the session, soft commodities rose in a relief rally in line with other commodities, but later the strengthening dollar dragged on the upside.
"There's a coherent financial plan now, and that has given everyone confidence," said Jaspal Phull, research analyst with Stenham Asset Management. "There's definitely a sense of relief." But Phull said some commodities were now trading at below their cost of production, triggering buying opportunities for funds.
Reflecting the views of other traders, he also noted possible industry buying of soft commodities as they bounced this week off multi-month lows.
Traders said investors were cautious, nervous that the latest spurt of buying could be shortlived due to uncertainty over prospects for the global economic downturn.
"As long as we are in a potentially recessionary period, there is a bearish outlook on commodity markets," Phull said.
A sugar futures broker said: "We've been telling people (clients) to do what they have to do, otherwise to wait."
Dealers said soft commodity futures prices, underpinned by stronger oil prices, could go higher before selling off again.
UK broker Sucden said: "Sugar, with other markets, seems poised for more of a retracement. Not only are we recovering from an oversold condition and panic liquidation, the dollar has pulled back from a tremendous rally at the end of last week."
Dealers said sugar futures should be supported by a tightening of global supplies of the sweetener into 2009.
ICE March raw sugar futures were up 0.05 cent or 0.4 percent to 11.75 cents a lb at 1446 GMT.
London December white sugar futures, having spent most of the session in positive territory, turned negative in the afternoon and stood down $1.0 or 0.3 percent to $334.0 per tonne in slim turnover of 1,978 lots at 1447 GMT.
Dealers referred to talk that Egypt's state-owned sugar buyer had bought Brazilian raw sugar, but there was no immediate confirmation.
Cocoa dealers said a fall in European third-quarter cocoa grindings was better than expected, and referred to trade and industry buying in light volumes.
Europe's cocoa grind was down 0.7 percent year-on-year in the third quarter at 348,501 tonnes, the Brussels-based European Cocoa Association (ECA) said on Tuesday.
Early gains in London cocoa futures were erased and turned negative as the pound strengthened against the dollar.
London March cocoa futures were down 2 pounds or 0.1 percent to 1,394 pounds per tonne in light volume of 1,738 lots at 1447 GMT.
ICE December cocoa futures were up $28 or 1.2 percent to $2,305 per tonne at 1448 GMT.
The market remained focused on the start of the West African main crops.
Ivory Coast cocoa farmers said on Monday they expected the recently started 2008/09 main crop to pick up strongly in November after favourable weather last week combining light rain showers with long sunny periods.
Cocoa arrivals at ports in Ivory Coast dropped slightly in the second week of the 2008/09 season due to delays and farmers' reluctance to sell beans below a generous reference price, exporters said on Monday.
Dealers referred to trade and industry buying interest in coffee futures, to take advantage of this week's bounce from oversold positions as financial market sentiment improved.
ICE December arabicas were up 2.05 cent or 1.7 percent to $1.1970 per lb at 1430 GMT.
London January robustas were up $32 or 1.8 percent to $1,846 per tonne in modest volume of 9,722 lots.
Vietnam's top coffee-growing province of Daklak plans to cut its crop area by 16 percent over the next seven years while keeping annual output unchanged at 6.7 million bags as it moves towards sustainable production.