Fonterra intends to grade milk supplies from more than 10,000 farms for fatty acid composition, effectively discouraging feeding of higher levels of palm kernel to cows.
Next season it would introduce a demerit system based on a six-day average fat evaluation index (FEI), to be printed on the tanker docket for each milk pick-up.
Since April all suppliers had been notified of their FEI numbers and they would have a season to change farming systems and prepare for the demerit system.
But Fonterra was not doing so for corporate responsibility or palm oil sustainability reasons, instead invoking potential dairy product quality issues.
Farm Source chief operating officer, Miles Hurrell said Fonterra did not take a position against palm products but also referred back to the March launch of the Trusted Goodness quality seal.