Both the council and Fonterra strongly deny the two senior managers' relationship would have had any impact on Fonterra's submission - in which Fonterra claims that it "generally supports the direction of the PC1" - or the outcome of the plan.
Farmers For Positive Change chairman Rick Burke said any collaborative process had to be managed well to be successful and Payne and Allen had not been transparent.
"Those with any conflict of interest or hidden agendas have to be removed from the process and they weren't ... So that's an absolute failure.
"It raises suspicion about the outcome of the process because they haven't been transparent."
Waikato Regional Council councillor farmer Stu Husband, who represents the Waihou ward, said there was genuine concern from the community that they kept it hidden.
"I've heard from several community members that they are concerned over the relationship of the CE and one of the submission writers of Fonterra Richard Allen and that it was biased.
"What these community members are saying is no Fonterra suppliers agree with their submission. They've talked to a lot of Fonterra suppliers and there's not really one that agrees with Fonterra's submission."
Waikato Federated Farmers president Andrew McGiven said he hoped Fonterra's processes would be robust enough that one person's input could not sway a submission, but said the real test would be later this year when submissions on the plan change and further submissions on the entire plan were called for and if Fonterra's position changed.
"If there have been some deep dark political motives in the background we need to find out about it because personally I wasn't overly impressed with the Fonterra submission. I thought it was pretty insipid and we were hoping for a little bit of a better submission out of them which would have challenged the plan for its farmers and it really didn't do that."
New Zealand First leader Winston Peters said the apparent conflict of interest and lack of transparency by Fonterra and the council was concerning.
"Given how controversial Waikato Regional Council's Plan Change 1 is, it pushes the bounds of credibility to believe that the Council's CEO, Vaughan Payne, never once raised it with his brother in law Richard Allen - a Fonterra environmental policy manager.
"It must have made for rather boring barbecues.
"Farmers and regional councillors deserve the truth here given Fonterra's stance on Plan Change 1 smacks of trying to run with its shareholders while hunting with the council's clipboard-wielding hounds. "
The council said Payne only "very recently" flagged the relationship with chairman Alan Livingston after being asked about it once the submission process had closed.
Payne did not believe there was a conflict because he did not have a decision-making role in the process.
The council required executives such as Vaughan to fill out a related-parties register annually - something it said Payne had never felt the need to do during his time as director and chief executive.
"I can state categorically that my relationship with a relative who works for Fonterra has had no bearing on the performance of my professional duties for this council, nor would I ever let such a relationship interfere with the proper exercise of my duties," Payne said.
The council said there was no formal requirement for the chief executive to declare this relationship as there was no conflict of interest because the process was being handled by independent commissioners.
Fonterra was also comfortable Allen's relationship with Payne had no impact on its final submission because it was developed with a range of stakeholders and following consultation with its shareholders.
"Richard is a subject matter expert, however he was just one of numerous contributors throughout the process. It's important to note Fonterra's PC1 submission is completely consistent with our board-approved policy positions on this matter and is aligned to the submission of the Waikato Dairy Leaders Group," a Fonterra spokesman said.
Fonterra did not respond to questions about whether it was aware of the potential conflict or its processes around these.
