Coffee prices finished at their highest for 12 years in New York as fund buying, fostered by a warning from the International Coffee Organisation of a "tight" market, overcame producer selling.

The ICO, an intergovernmental group representing both producing and selling nations, said that a meeting with Brazilian officials had concluded that the coffee market's "tight demand and supply situation is likely to persist in the near- to medium-term".

Jose Sette, the ICO's head of operations, told Agrimoney.com that "nothing has fundamentally changed" since a report last month in which the organisation forecast world production in 2010-11 of 133m-135m bags, potentially leading to a supply deficit.

Coffee consumption will reach 134m bags this calendar year, the report said.

'Bullish story'

Prices for New York's September arabica bean contract soared 3.3% to finish at 176.30 cents a pound, the highest since February 1998.

London robusta beans for September ended 3.8% higher at $1,810 a tonne, only $3 below a contract high set earlier.

Traders said that the buying was led by funds, whose revived interest in farm commodities has also been reflected in soaring grain and sugar prices.

"We are seeing more fund activity coming in across the commodity board," a London analyst told Agrimoney.com.

Interest in coffee was helped because of the "bullish fundamental story behind it", with interest also sparked by a slump in stocks held for delivery against New York contracts.

'Dreaded funds'

The higher prices did attract some afternoon selling from growers, with New York prices dipping briefly into negative territory.

From the perspective of Brazilian growers, the world's biggest coffee producers, prices had become "quite attractive from a historical perspective", the analyst said, topping the equivalent of R$3 a pound.

"It has been R$2.25 relatively recently."

However, a late buying spree, also reflected in the grains markets, pulled the crops higher by the close.

"It's all down to the dreaded funds," Ralph Hawes, at Sucden Financial, said.