New Zealand's biggest farming company, the state-owned Landcorp, said it would stop using the controversial feed supplement, palm kernel expeller (PKE), by the end of its financial year in June 2017.
Chief executive Steven Carden said that all Landcorp farms would transition to alternative feed supplements by that time.
Fonterra last year moved to discourage its farmers from using palm kernel, which has been made extensive use of because its ability to "turbo-charge" dairy production.
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," Carden said in a statement.
"We need to anticipate shifting consumer expectations on how their food is produced and change how we farm accordingly," he said.
Carden said that there were times and conditions such as winter and seasonal droughts that meant having alternative food sources to pasture was necessary.
"Like many other farmers, we've found PKE to be an effective supplementary feed," he aid. "But we don't want to continue using it and we now have plans in place to adjust our farming systems and use other, locally-sourced, feeds."
He said the shift to remove PKE from its farm was expected to be virtually cost-neutral and that there would be significant longer term gains to be made in terms of Landcorp's ability to attract new premium customers.
Like many other farmers, we've found PKE to be an effective supplementary feed. But we don't want to continue using it and we now have plans in place to adjust our farming systems and use other, locally-sourced, feeds.
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Guy Salmon, chairman 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.
At present, around 60 per cent of Landcorp's farms do not use any PKE. The supplement is not used on any livestock farms and a few dairy farms are already PKE-free.
In 2013/14, Landcorp's peak year of using the supplement, it represented about 6 per cent of the average total diet of a dairy cow. Last year that figure reduced to less than 4 per cent.
Last September, Fonterra issued a set of guidelines recommending its farmers feed their herds a maximum of 3 kg of PKE per cow per day.
"Consumers love New Zealand dairy products and we want to increase that value by ensuring our New Zealand milk comes from predominantly grass-fed cows," said Miles Hurrell, Fonterra's managing director of co-operative affairs, said at the time.
Environmental group Greenpeace welcomed the move.
"Greenpeace has been campaigning for seven years for a phase-out of PKE on New Zealand farms, due to its role in both tropical rainforest destruction and industrial dairying" Greenpeace spokesman Grant Rosoman said.
PKE is a by-product of the palm oil industry, which is the leading cause of rainforest destruction in Indonesia.
"Landcorp's decision marks a significant turnaround for both the protection of South East Asia's rainforests and for the way New Zealand farms.
"PKE has been a big part of the intensive dairy model that has failed our rivers, land, climate and farmers," he said in a statement.
"It's great to see a major player like Landcorp turning its back on that model and moving back towards traditional New Zealand pasture-based farming. Next, we want to see Fonterra follow suit," he said. New Zealand is currently the largest importer of PKE, using about a quarter of the world's supply each year as supplementary feed for livestock.