Economists say Landcorp's decision to stop using palm kernel expeller (PKE) as a supplementary feed is a sign of things to come as dairy farmers move back to a traditional grass-fed farming model.
State-owned Landcorp, New Zealand's biggest farming company, said it would stop using PKE by the end of its financial year next June.
Chief executive Steve Carden said one of the points of difference for New Zealand farming was its ability to grow grass and produce grass-fed animals. "Landcorp wants our partners and customers to know they can trust that we farm sustainably and care for the environment."
Economists said Landcorp's decision was a sign of the times.
"What you are probably going to see over the time is more accreditation processes that give extra premiums for the way milk is produced or for milk that meets certain standards," ANZ rural economist Con Williams said.
Westpac senior economist Anne Boniface said the move showed that consumers were placing more importance on where their food comes from and how it is produced.
"Processes that have serious environmental concerns can get negative publicity and people can react to that," she said.
Palm kernel became popular in 2007 when a drought sent North Island farmers looking for new feed sources. Imports of palm kernel - a byproduct of the palm oil industry - went from 96,000 tonnes in 2003 to a record 2 million tonnes in 2014.
NZ is the largest importer of PKE, using about a quarter of the world's supply each year as supplementary feed for livestock. PKE imports were high the latter months of 2015 and early this year, partly reflecting expectations that the El Nino weather pattern would result in drought. Imports fell sharply when it became clear drought did not pose a threat for most of NZ.
With farmgate milk prices running at below the cost of production, farmers are also paring back their PKE use to reduce their costs.
Fonterra - fearing too much use of PKE could work against the country's reputation as a mostly grass-based farming system - last year moved to discourage its farmers from using the supplement.
Last September, Fonterra issued a set of guidelines recommending its farmers feed their herds a maximum of 3kg of PKE per cow per day.
Guy Salmon, chair of Landcorp's independent Environmental Reference Group, said the group welcomed the announcement.
"We've discussed this issue with Landcorp over the last year and it's great to see this outcome. Landcorp is pushing itself to develop solutions to protect the environment that also make sense commercially," he said.
Salmon said palm kernel, which was imported from Southeast Asia, had a large carbon footprint. The oil palm industry and government authorities were struggling to gain effective control over tropical forest clearance and peat fires driven by oil palm industry expansion.
About 60 per cent of Landcorp's farms do not use any PKE. The supplement is not used on any livestock farms and a few of its dairy farms are already PKE-free.