New Zealand imports of controversial feed supplement palm kernel expeller (PKE) fell by about one third last year, reflecting cost-cutting measures as farmers adjusted to sharply lower milk prices.

Data out this week showed PKE imports came to 1.5 million tonnes in 2016, down from a record 2.2m tonnes in 2015 and 2.12m tonnes in 2014.

Environmentalists are against the use of PKE - a by-product of the palm oil industry - because they say it promotes deforestation.

Fonterra has discouraged its use as it says it detracts from New Zealand's image as a predominantly pasture-based dairy producer.

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AgriHQ dairy analyst Susan Kilsby said farmers were still very conscious of their costs, despite the Fonterra milk price improving to $6 per kg of milksolids from $3.90/kg in 2015/6 and $4.40/kg in 2014/5.

A milk price of around $5.05/kg is regarded as the break-even point and the past two seasons have prompted many farmers to borrow heavily.

"The milk price has picked up but it has not really picked up at the farm level yet," she said. "Farm overdrafts are still incredibly high.

"It's going to be take at least until the end of this season for them to make up any ground."

Analysts do not expect to see demand pick up for PKE, although Kilsby said farmers use it "to fill the gaps where it makes sense".

PKE and other supplements have in the past been used to extend the end of the season, when prices were favourable.

Kilsby said PKE in particular has been popular as a cheap source of feed.

"Every farmer has a different view on PKE," Kilsby said. "But the drop in demand is driven by farmers pulling costs back."

New Zealand's biggest farming company, the state-owned Landcorp, has signalled its intention to stop PKE by the end of its financial year in June, after which time Landcorp farms would transition to alternative feed supplements.

New Zealand dairy production this season is falling, but not as quickly as some had expected.

Data from the Dairy Companies Association of NZ, which collects data from all the major dairy companies, shows production fell by 3.6 per cent in terms of milksolids in the season to date up to December.

Over the same period, Fonterra has reported a 5.5 per cent decline, indicating the co-op has lost suppliers to its competitors, Kilsby said.