WELLINGTON, Oct. 1 -- New Zealand's pillar dairy industry is facing a prolonged period of low prices as the global market struggles to soak up surplus, according to a report out Wednesday.

The Dairy Quarterly report from Rabobank said international dairy prices, which have fallen since the second quarter this year, were well below levels that would be sustainable in the medium term.

However, milk production had continued to expand strongly in global export regions, while China had pulled back from buying on the international market as it concentrated on digesting stock accumulated in early 2014, with other buyers unable to take up the slack, Rabobank director of dairy research New Zealand and Asia Hayley Moynihan said.

"However, while a bottom appears to have been reached for New Zealand and Australian export prices, market rebalancing will be a slow process and price recovery looks some way off," Moynihan said in a statement.

"The next year promises to be challenging for New Zealand's dairy producers, however the longer-term outlook remains positive, with prices expected to return to more profitable levels for farmers into the 2015-2016 season," she said.

"Rabobank firmly believes the current downturn in prices is cyclical, as agricultural commodity prices often are, rather than a more fundamental structural change, and farmers will work hard to 'wait out' the lower price cycle by trimming less-productive farm expenditure or deferring longer term cap-ex decisions."

Last month, dairy giants Fonterra and Synlait announced they were looking to slash payouts to farmers on the back of weakening global demand, prompting concerns over New Zealand's economic growth.

Statistics New Zealand announced last month that milk powder, butter and cheese exports to China fell 35 percent year on year in August, although China remained the top destination for dairy products, taking 14 percent of the total.

The Federated Farmers industry group maintained the falling prices were due to an unusually good global production season in the first half of 2014, which put an extra 7 billion liters of internationally traded milk on to the market.

Goldman Sachs reportedly forecast earlier this year that annual global dairy output would exceed demand by 2 billion liters through to 2018 a five-year glut that would depress prices.