New Zealand dairy giant Fonterra is facing the possibility of strike action after pay talks with the Dairy Workers' Union (DWU) collapsed.

The union has given two weeks' notice of "work to rule" industrial action. However, it said the strike would be "very limited" to protect the environment and have minimal financial impact on farmers.

The DWU is pushing for a pay hike of 8% this year, and Consumers Price Index (CPI)-linked pay rise, plus 1%, for next year.

Fonterra has offered a 5% rise plus a 2.5% lump sum this year, CPI plus a 1% lump sum for the second year, and CPI plus 1% for the third year.

However, the Fonterra proposal would see the dairy workers lose a bonus scheme that has been in operation for the last five years, the DWU said.

"While this may appear on the surface that the parties are not far apart, Fonterra have withdrawn the bonus which has been in operation for the last five years and has been worth an extra 2% on average. So in effect, Fonterra are offering a pay increase less than CPI, and swapping the bonus for a one-off lump sum payment for this year only," the union said in a statement.

The strike is set to begin on 17 November, if mediation between the two groups fails.