UPDATE 2-ICCO cuts cocoa grindings 10 pct in Asia, Oceania

* ICCO cuts grindings by 10 pct in Asia, Oceania

* Malaysia grindings down 12 pct, Indonesia down 20 pct

* Butter ratios at 5-year low due to slackening demand

* Grinders forced to cut powder prices to attract buyers

* Indonesia's cocoa output seen up 3 pct in 2008/09 (Adds comments, graphic)

SINGAPORE, March 10 - Cocoa grindings are forecast to fall 10 percent to 719,100 tonnes in Asia and Oceania in the crop year to September because of the global economic slump, led by declines in Malaysia and Indonesia, the International Cocoa Organization said on Tuesday.

Butter ratios are at five-year lows due to waning demand for the key ingredient for making chocolates after factories slashed purchases. Grinders are also forced to cut prices of other products such as cocoa powder to lure buyers, dealers said.

The ratios are a key indicator of demand. Butter prices are determined by multiplying the ratio with related contracts in London futures.

"End-users are holding back on purchases. Only very efficient factories can still run," said Lukas Jasman of PT Bumitangerang Mesindotama, which is Indonesia's third-largest cocoa grinder.

"Small factories with capacity of below 10,000 tonnes have all stopped operations," said Jasman, adding that consumers also shifted to cheaper chocolates.

Grindings in Asia and Oceania, which include China, Israel, South Korea, Sri Lanka, Thailand and Turkey, account for about 20 percent of global grindings estimated at 3.7 million tonnes, according to the ICCO.

For a graphic on grindings in selected Asian countries, click: https://customers.reuters.com/d/graphics/CD_CCOGR0309.gif

"Cocoa processing companies located in the Asia and Oceania region are expected to suffer severely from the economic downturn," the ICCO said in its quarterly statistical report emailed to Reuters.

Malaysia, Asia's largest grinder, is estimated to process 290,000 tonnes of beans, down from 331,000 tonnes in 2007/08. Grindings in Indonesia, the region's second-largest grinder, are likely to fall 20 percent to 150,000 tonnes.

The ICCO estimated Indonesia's cocoa output to rise to 510,000 tonnes in 2008/09 (Oct-Sept) from 495,000 tonnes in the previous year. Indonesia is the world's third-largest cocoa producer after Ivory Coast and Ghana.

The most active May contract in New York cocoa futures fell to a one-week low at $2,220 a tonne on Monday, not far from a three-month low of $2,198 hit last week due to fears of falling demand for beans.

Butter was offered at ratio of 2.10 times London futures, but some buyers indicated they might want to buy the product at a ratio of 1.50 -- a level last seen in 2000..

The ICCO said it had revised up Indonesia's beans output in the 2007/08 crop year to 495,000 tonnes from 480,000 tonnes and pegged this year's production at 510,000 tonnes.

"During the previous season, Indonesia'scocoa production suffered from the devastating Vascular-Streak Dieback (VSD) disease which had spread in Sulawesi.

"Thanks to increasing production in new areas, cocoa output may slightly recover, reaching 510,000 tonnes in 2008/09. However a high degree of uncertainty remains on this short-term outlook."

The VSD disease attacks leaves, branches and trunks and had spread in the provinces of South, Central and Southeast Sulawesi, which account for 75 percent of Indonesia's cocoa output, said dealers.

Last week, the ICCO forecast a wider global cocoa deficit of 193,000 tonnes in 2008/09 with a drop in production only partially offset by lower grindings.

Global production was seen falling in 2008/09 by 5.0 percent to 3.52 million tonnes from 3.71 million with world grindings seen down 2.1 percent at 3.68 million tonnes.