UPDATE 1-Open interest in ICE soft jumps as bargain hunters lurk
* Raw sugar open interest at 3-year high
* Open interest up in arabica after falling 37 pct in 2012
* Cotton open interest rises to 2-year peak
NEW YORK, Feb 7 (Reuters) - Open interest in sugar, cotton and cocoa, some of the worst-performing commodities in 2012, have soared in the first five weeks of the year as traders and speculative investors seek out bargains hoping for big returns, traders and analysts said.
"The softs have been one of the worst performing asset classes that we've seen over the last twelve months," said Spencer Patton, founder and chief investment officer of Steel Vine Investments in Chicago.
"You're probably seeing fairly decent value players start to try to catch a bottom in coffee and sugar. They're both right near their lows for the year."
Total open interest in raw sugar futures jumped by 0.9 percent to 848,677 contracts on Feb. 6, the highest in three years, ICE data showed on Thursday.
The benchmark sugar contract finished 2012 down 16.3 percent, marking its second straight year of decline as the market faced its third straight surplus year. On Thursday, it closed down 0.03 cent at 18.16 cents per lb, up just a touch from last month's 2-1/2-year low at 18.06 cents.
Speculators are still holding a large net short position in sugar futures and options at 64,774 lots in the week to Jan. 29, coming off a record large net short position the previous week, when they held their most bearish stance since the U.S. Commodity Futures Trading Commission (CFTC) first made the data available in 2006.
Arabica coffee futures, which finished 2012 down nearly 37 percent, the biggest decliner of 19 commodities on the Thomson Reuters-Jefferies CRB index, also faces plentiful supplies. The second-position contract is hovering just above the 2-1/2-year low reached in December at $1.4220 per lb.
On Feb. 6, total open interest rose for the fourth straight day, rising 1,827 lots to 164,601 lots, the highest since August 2010, ICE data showed.
"Whether it's the expansion of new shorts or initiation of new positions by value buyers, it's starting to indicate that a low is near," Patton said, referring to the rising open interest.
Speculators are also holding a large net short position in arabica futures and options.
In cotton futures , a market in which speculators are holding a large net long position after the benchmark contract recently reached an 8-1/2-month high, open interest is also soaring.
"Funds get their money from equities and equities have been strong. They have to put it in some commodity," said John Flanagan of Flanagan Trading.
"They look at cotton and say: 'If the stock market is strong that means industry is good, so let's put some money in.'"
On Wednesday, open interest in cotton futures rose for the eighth straight day, up 1,429 contracts to 214,167 contracts, the highest since February 2011.
"Cotton is cheap, relative to other commodities. The index funds always want to be long cotton a certain percentage," said Jobe Moss of cotton traders MCM Inc in Lubbock, Texas.
"Some of them rebalance and they've made so much money in grains, they pour money into the cheapest thing that's under weighted."
Cotton was the third weakest performer on the CRB, falling 17 percent from the previous year as the market struggled with oversupply.
Open interest in cocoa futures recently hit a record high exceeding 210,000 lots on Jan. 30, but have since declined by nearly 4 percent, reaching 202,554 lots on Feb. 6.
The small frozen concentrated orange juice futures market was the odd one out on the softs complex, with open interest inching down by 109 lots to 21,059 lots in the previous session, up nearly 5 percent from the nine-month low reached on Jan. 24 at 20,118 lots.