Wellington  - The New Zealand economy, already technically in a recession, suffered a further blow Friday when dairy farmers were warned to brace themselves for a 700-million-New-Zealand-dollar (about 364 million US dollars) cut in their projected income.

Dairy farmers are the main driver of the rural economy in New Zealand and analysts said the impact of their reduced income would be particularly harsh in small provincial towns, already facing rising unemployment as the recession bites.

The Fonterra Co-operative Group, which has a huge influence on the economy as the country's biggest single exporter, slashed its forecast payment for milk for the current season by 60 cents to 6 New Zealand dollars per kilogram of milk solids.

Fonterra had already reduced its original forecast of 7 New Zealand dollars by 40 cents in September and its 10,700 farmer- shareholders now face a final payout at least 1.66 New Zealand dollars lower than they received in the last season, which ended on May 31.

Chairman Henry van der Heyden said the revised forecast followed a 24-per-cent fall in international dairy commodity prices in the last two months, exacerbated by the global financial crisis.

"There is a great deal of uncertainty around the world - industry and trade activity is slowing down and all the forecasts are pointing to a global recession," he said.

"We have seen a real tightening in consumer spending and dairy is not immune to this rapid deterioration in the global economy."

Fonterra is the world's biggest dairy exporter, selling butter, cheese and other consumer products and ingredients for the international food industry to 140 countries.

Fonterra chief executive Andrew Ferrier said international demand for dairy products was not expected to recover and lift commodity prices by the middle of next year, as had been predicted earlier.

Stocks in the European Union were building and the market had not yet absorbed surpluses in the United States, he said.

"This combination of excess stocks and weak demand has driven prices down rapidly," Ferrier said. "A re-balancing of the market is unlikely in the short term."

Fonterra has been additionally hit by the poisoned milk powder scandal in China, where it held a 43 per cent stake in the worst affected company Sanlu.

The New Zealand company has already written off 169 million New Zealand dollars of its investment in Sanlu and Ferrier said it was likely to have to write off the remaining 62 million New Zealand dollars. (dpa)