GRAPHICS-Record arabica coffee premiums give bullish signal for funds

* ICE certified stocks to fall well below 2 million T- traders

* Benchmark Honduran premiums at highest ever

* Speculators starting to shift from short to long

LONDON, March 9 (Reuters) - Record arabica premiums in the physical markets could spur fund-buying as traders expect they will have a knock-on effect on the availability of coffee stocks for delivery when exchange contracts expire.

ICE certified stocks KC-TOT-TOT began drifting lower last month. They are at 2.1 million bags, but traders expect them to fall well below 2 million this year as soaring premiums make exchange stock by far the cheapest source of coffee.

Premiums, or the price difference to the benchmark washed Honduran arabica, deliverable to ICE, are at 20 cents per lb above ICE futures COF-WARB-HNHDF, their highest ever. The coffee commands no premium if withdrawn from ICE warehouses, and would fetch no premium if delivered to ICE.

“At the end of September, I expect to see certified stocks at 1.1 million bags,” a Geneva-based trader at a major commodities trade house said.

He said his firm, one of the biggest players in coffee, was planning to take delivery of exchange stock in June but this was not evident yet in the data. “We’re quite a big player, that’s why I say 1 million bags are spoken for.”

Honduras accounts for less than 10% of global arabica production but makes up three quarters of ICE certified stock and thus has a disproportionate impact on futures prices.

Some speculative funds are programmed to go long if ICE-certified stocks start to fall. Arabica prices soared 25% in the fourth quarter last year as stocks fell 10%, then plunged 20% in January as stocks rose 7%.

In February, as panic over the coronavirus outbreak gripped commodities and prompted falls in equities not seen since the 2008 financial crisis, arabica was one of the few bright spots, gaining 6% as ICE stocks drifted down 2%.

“Guatemala, Honduras, Colombia are all incredibly tight. Until the Colombia mid-crop gets under way in May or June, it’s going to get tighter,” said Harris Haase, head of U.S.-based Cardiff Coffee Trading.

While the tightness in exchange-deliverable arabica should ease later this year as top producer Brazil is expected to harvest another record crop from May onwards, the impact of the crop on prices could be less marked than in previous years.

Two of Brazil’s top three farmer cooperatives told Reuters they have sold nearly half their 2020 crop, putting them under less pressure to sell as the year unfolds and meaning futures could face little resistance on the upside should speculators choose to go net long.

“In the fourth quarter rally last year, there was origin selling all the way up. It was more a man-made rally. This time there’s not much origin selling,” said a dealer, referring to selling from producer countries.

CFTC data shows speculators, who have tended to favour shorting coffee over the past few years, trimmed their net short down to 16,229 lots in late February from 50,777 lots in late October.

The washed coffee shortage was brewing for much of last year after decade low prices prompted farmers in Central America and much of South America, with the exception of Brazil, to abandon their farms and head to the United States border.

Additional reporting by Marcelo Teixeira in Sao Paolo; editing by Barbara Lewis