The clearance of forests for palm oil production in Indonesia has helped feed New Zealand's cattle boom.

The consequences of last year's massive forest fires in Indonesia finally look set to catch up with the Kiwi dairy industry.

Fonterra will no longer be supplied with palm kernel expeller (PKE) from plantations owned by IOI Group, which is the second-largest palm plantation owner listed on the Malaysian stock market.

The ban could increase the price of PKE, which has become an important supplementary feed for New Zealand cattle despite concerns over the environmental impact of its production.

IOI was one company implicated by a Greenpeace report into Indonesia's forest fires which released an estimated 1.7 billion tonnes of carbon into the atmosphere last year and threatened the habits of endangered animals such as orangutans.

READ MORE:

* Fonterra, Greenpeace hold 'constructive' talks over palm kernel expeller (PKE)

* Indonesian forest fires fuel row over palm kernel purchases

* Greenpeace says Fonterra's defence on PKE undermined by report

The Roundtable on Sustainable Palm Oil (RSPO) industry association suspended IOI in April after it investigated earlier allegations from another environmental body, Aidenvironment, regarding its plantations in Indonesia.

Consumer giant Unilever stopped sourcing palm products from IOI in March and Nestle has now followed.

IOI responded last week by suing the RSPO.

The RSPO warned the suspension could disrupt supplies of "certified sustainable" palm products.

The developments could be seen as a win for environmentalists.

But they may also be embarrassing for dairy farmers, some of whom have come to rely on vast imports of PKE over the past decade.

New Zealand imported a record 2.4 million tonnes of PKE last year, up from 2.2m tonnes in 2014, according to the United States Agriculture Department.

That represented more than a third of global imports of PKE, which is a byproduct of palm oil production.

Pound for pound, New Zealand's imports of PKE exceeded the country's exports of milk powder last year, which totalled 1.5 million tonnes.

Singapore-based Wilmar International, through which Fonterra buys all its PKE, confirmed it had bought palm products from IOI, including from one plantation specifically identified in Greenpeace's report.

But Iris Chan Suet Yeng, a spokeswoman for Wilmar in Singapore, said it had now stopped buying palm products from IOI.

Greenpeace alleged last year that "significant deforestation", burnings and the drainage of peatlands had occurred at the IOI-owned PT Bumi Sawit Sejahtera plantation in West Kalimantan in Indonesia, leading to the destruction of forested areas with "high conservation value".

The forested areas of the concession were a habitat for endangered orangutans and Bornean gibbons, it said.

The RSPO's complaints panel said in March that IOI had illegally cleared 141 hectares of peat land at PT Bumi Sawit Sejaterah.

IOI admitted clearing the land before February 2014 but said that was an "unfortunate mistake" which resulted from reliance on a consultant's report, and said it had taken immediate action to rehabilitate the land with indigenous plantings.

Chief executive Lee Yeow Chor wrote to the RSPO in March appealing for it not to let the withdrawal of its sustainability certification affect its existing supply contracts.

Chor said IOI was "suffering losses on a daily basis" and the suspension would push up the already rising price of palm products.

Fonterra chief executive Theo Spierings met with Greenpeace New Zealand head Russel Norman in December to discuss the broader PKE issue, with Norman labelling the talks "surprisingly constructive".