INTERVIEW-Indonesia cocoa output to drop over 10 pct in 2017/18 -trader

* Indonesia to produce 240,000 T of cocoa in 2017/18 -trader

* Farmers reduce plantations after steep decline in cocoa prices

* Prices hit by supply glut following bumper harvests

* Indonesia is Asia's top producer of the chocolate ingredient

SINGAPORE, Oct 4 (Reuters) - Indonesian cocoa production is likely to drop over 10 percent in the year to September 2018, with farmers reducing the size of plantations following a deep slide in prices, a leading trader told Reuters.

The country, Asia's biggest cocoa producer, will churn out around 240,000 tonnes of the chocolate ingredient in 2017/18, down from 270,000 tonnes a year ago, Paul Davis, deputy head of cocoa at French commodity trader Sucden said in an interview on Wednesday.

"It simply doesn't seem to be a competitive business at these price levels," he said.

"It is brutal, if it doesn't make money, chop it."

New York cocoa is trading around 40 percent below a peak of $3,422 a tonne marked in December 2015, largely dragged down by a glut in supply following bumper crops. Although the market has risen from a 10-year low struck in June at $1,769 a tonne.

London cocoa has also lost about 40 percent after climbing to a six-year high of 2,578 pounds per tonne in July 2016.

Industry officials say Indonesian farmers are replacing cocoa crops with pepper, corn and other commodities that offer better returns.

Ivory Coast and Ghana, the world's top cocoa producers, plan to create a buffer stock of beans with the aim of exerting more influence over world prices, a senior Ivorian government official told Reuters last month. The two West African neighbours produce over 60 percent of the global supply of cocoa.

But the drop in prices is expected to boost chocolate demand, leading to a smaller surplus at the end of 2017/18, Davis said, declining to give his estimate on the size of the surplus for the year.

"When you are hearing that every single processor in Asia is probably working flat out right now and has got no spare capacity to sell one container of product until April-May next year, it is demand," he said on the sidelines of an industry event in Singapore.

A Reuters poll in July forecast a global surplus of 100,000 tonnes in the 2017/18 season, down from about 350,000 tonnes estimated for last year. (Reporting by Naveen Thukral; Editing by Joseph Radford)