The government has decided to allow Fonterra to stop taking milk from new dairy farms.

Photo: RNZ / YouTube

It will also reinforce its rights to refuse milk from farmers whose standards of conduct are not deemed good enough, but it is stopping short of radical reforms which had been called for by many in the industry.

Photo: RNZ / Dom Thomas

Minister of Agriculture Damien O'Connor said Cabinet had made a decision to proceed with the changes and would introduce legislation into Parliament.

This follows the lengthy so-called DIRA review, which looked at the Dairy Industry Restructuring Act 2001.

"The industry has changed considerably since 2001, and it is important to ensure the regulatory regime puts the sector in the best possible position," Mr O'Connor said.

"The government is committed to building a modern and productive economy and that means being smarter in how we work."

The decision to allow Fonterra to stop taking milk from new dairy conversions will be welcomed by the company.

It argued earlier that having to buy milk from anyone who wanted to sell it increased its fixed costs in a market that required flexibility.

In its decision, the government has acknowledged this need for Fonterra to be able to move quickly so it can manage its business well.

The move will also be welcomed by environmentalists, who argued the existing system encouraged the spread of dairy farming at an ecological cost.

The government has also cemented in Fonterra's rights to refuse milk supply from farmers in circumstances where milk is not compliant or is unlikely to comply with Fonterra's terms.

It said this removed a reputational risk for Fonterra.

But the government has stopped short of ending the so-called "Open Entry" and "Open Exit" rules.

These rules obligated Fonterra to buy from farmers who choose to sell, while those farmers could leave Fonterra if they wished.

The government argued these measures made sure Fonterra would have to compete hard for farmers' milk.

They also allowed farmers to leave dairying if they found a better use for their land.

In another change, the government has decided to remove the requirement for Fonterra to supply milk to independent processors with their own supply of 30 million litres or more in a season.

Fonterra always objected to this rule as meaning it was forced to subsidise its rivals.

People or organisations affected by these changes will now have the right to express their views to a Parliamentary select committee.