Fonterra Cooperative Group has followed through on its work into the impact of palm kernel expeller on the composition of fat in the milk it collects with a grading system that will start in September 2018.
The new system follows consultation with farmers and is the latest step in Fonterra's efforts to reinforce its Trusted Goodness logo, which is designed to appeal to consumers who want sustainable and ethical practices in food production and is underpinned by New Zealand's "natural, grass-fed advantage".
But Fonterra's research has shown that PKE also has implications for dairy product manufacturing and sales in global markets of products such as butter.
Fonterra accounts for one-third of PKE imports, which it sells through its Farm Source stores, but conducted feed trials to better understand what impact its use has on milk fat, which is made up of at least 300 fatty acids.
The company focussed on 30 of the most prominent fatty acids and concluded that high rates of PKE use "change the amounts and the ratios of these fatty acids".
Last year Landcorp announced that the state-owned farmer would stop using the imported feed, which is a by-product of the production of palm oil in countries such as Indonesia and Malaysia.
Greenpeace has campaigned against the feed because palm oil producers have burned and cleared tropical rainforest, the habitat of endangered creatures including the Orangutan, to plant the crop.
In 2015 Fonterra announced a voluntary limit of three kilograms per cow per day of the feed, which farmers turn to when there's a shortage of grass, such as during drought.
In a statement today, Federated Farmers reminded dairy farmers and sharemilkers "to update existing business agreements as they face joint liability to meet upcoming changes for using palm kernel (PKE) as feed."
"Fonterra is introducing a grading system next September to measure milk fat composition, which changes with excessive use of PKE impacting on manufacturing capability and seasonal customer preferences," the Fed's Sharemilker Farm Owners' Section chair Tony Wilding said.
"Fonterra farmers who don't comply with new recommended levels for cows' PKE intake will be penalised," he said.
The farmers' lobby group says farm owners and sharemilkers in current agreements "should seek to add a clause to address this new risk. New agreements will also have an additional clause under milk grading and feed to direct the parties."
"Our conclusion is this is the fairest way of allocating these new demerits as per the revenue share of milk production," Wilding said.
Last year, Fonterra announced that it would only import PKE from sustainable sources where there was no risk of deforestation. It buys all of its PKE from Wilmar International.
In October this year it began talks with farmers about finalising penalties for excessive PKE use with the aim of imposing a new grading system next September, NZ Farmer reported at the time.