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UPDATE 2-Global dairy prices fall for 3rd auction in a row, threatening recovery

recovery@

* Dairy prices fall 3.5 pct at fortnightly auction

* Prices drop for third time in a row

* Weaker prices could start to impact farmers' incomes - analyst

(Recasts; adds farmer comment) WELLINGTON, Nov 8 (Reuters) - Global dairy prices slumped to a seven-month low on Wednesday, suggesting an earlier rally was running out of steam and that farmers' incomes could be hit if the trend continued. The GDT Price Index dipped 3.5 percent, for its third drop in a row, as Asian demand for whole milk powder dampened. The average selling price at the auction held in the early hours of the morning was $3,105 per tonne. Prices had risen in the second quarter on strong global demand and as production eased, but have since had a bumpy ride on volatile global demand. "The soft result adds to the likelihood of Fonterra downgrading its milk price forecast for the current season," BNZ markets strategist Jason Wong said in a research note.

Dairy giant Fonterra currently pays out NZ$6.75 per

kilogram of milk solids to its New Zealand farmers. Farmers are still nervous after years of plummeting prices which only started a slow recovery at the end of 2015. Chris Lewis, dairy chairman for farmers' industry group Federated Farmers, said that soft results in recent auctions were disappointing and that the next two auctions would be critical to determining any cuts to the farmgate milk payment. "We're definitely not going to take our eye off it ... The next auction there could be a bit more of a dip," said Lewis. The currency fell around 0.5 percent to $0.6907 in the wake of the auction, given the dairy sector generates more than 7 percent of the nation's gross domestic product. Longer term, economists and farmers were hopeful the situation would improve as wet weather curbed production in New Zealand, the world's largest dairy exporter. The lower supply could lead to a pick-up in prices in the new year, Lewis said. Whole milk powder was hit particularly hard in the latest auction, falling 5.5 percent on lower demand from China. Skim milk powder fared better, bouncing off a surprise fall in the previous auction for a price gain of 1.2 percent. A total of 35,072 tonnes was sold at the latest auction, down 1.7 percent from the previous one, the auction platform said GDT Events is owned by New Zealands Fonterra Co-operative Group Ltd, but operates independently of the dairy company.

U.S.-listed CRA International Inc is the trading

manager for the twice-monthly Global Dairy Trade auction. The next one is scheduled for Nov. 21.

(Reporting by Charlotte Greenfield; Editing by Greg Mahlich and James Dalgleish)