May 28, 2015 / 1:11 AM / in 2 years

UPDATE 2-Global dairy demand to pick up only slightly - NZ's Fonterra

* Fonterra sees slight recovery in global dairy demand, prices

* Sees NZ dairy output growth slowing due to low prices

* Sets opening 2015/16 payout forecast at NZ$5.25 (Recasts, adds CEO comments)

By Naomi Tajitsu

WELLINGTON, May 28 (Reuters) - Global dairy prices are expected to pick up only slightly over the next 12 months, New Zealand dairy co-operative Fonterra, the world's largest dairy exporter, said on Thursday.

Fonterra said the subdued outlook amid sluggish demand would likely slow the pace of New Zealand dairy output growth, and kept its forecast payout price to farmers for 2015/16 below the long-term trend despite a rise from this year's eight-year low.

Persistently low dairy prices have clouded the growth outlook in the agriculture-based economy where dairy products make up more than a quarter of total exports, and raise the possibility of an interest rate cut in coming months.

Fonterra increased its initial forecast for its farmgate payout price to NZ$5.25 ($3.81) per kilogram of milk solids from NZ$4.40 this year, reflecting a recent slight lift in global prices which have tumbled around 50 percent since 2014.

The forecast payout is still below a long-term average around $6.50, raising the risk that farmers may rein in the strong growth seen in the country's "white gold" industry in the past decade and take on more debt.

"At these payout prices, I'm not expecting massive production growth next season," Fonterra CEO Theo Spierings told Reuters.

"It could turn out to be a season of 1 percent or 2 percent growth," he said, lower than average annual growth of around 3 percent in past years.

Fonterra, which controls about a third of global dairy exports, expected only a limited pick up in global prices as demand from conflict-stricken countries in the Middle East and Africa continues to fall despite some gains in top buyer China and Southeast Asia.

Spierings said prices for whole milk powder, New Zealand's biggest export product, would likely average around $2,900 per tonne in the next 12 months, up from near-historic lows around $2,400 at present but well below highs of $5,200 in late 2013.

He was "cautious" about any pick-up in demand next year, and said an environment of lower global dairy prices would likely curb the company's expansion plans and slow offshore investments, including in its dairy farms in China.

Low dairy prices also increase the risk that New Zealand's farmers, already strapped for cash due to this year's low payout, may take on more debt. The dairy sector accounts for around 10 percent of total borrowing in the country.

"Cashflows will continue to be very tight ... it's going to be tight for the majority of farmers over the next little while," ASB Bank rural economist Nathan Penny said. ($1 = 1.3770 New Zealand dollars)

Reporting by Naomi Tajitsu; Editing by Andrew Hay and Richard Pullin

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