New Zealand farmers' use of palm kernel has been linked to rainforest destruction, but apologists have said it is simply a by-product of the palm oil industry.

Landcorp's decision to stop using palm kernel expeller (PKE) has been hailed by environment groups as a step towards halting rainforest destruction.

Greenpeace said PKE was a by-product of the palm oil industry, "the leading cause of rainforest destruction in Indonesia". The group had been campaigning for the last seven years on the issue.

PKE is used mainly in the dairy industry as a supplement to boost milk production.

Landcorp feeds 10,700 tonnes of palm kernel to its dairy cows.

New Zealand's largest farmer said it would stop using the feed supplement from the end of June 2017. Its present use is 10,700 tonnes, down from a high of 15,200 tonnes at the peak of the dairy boom in 2013-14.

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Landcorp said 60 per cent of its farms did not use any PKE. It was not fed to any beef cattle or sheep and deer, and a few dairy farms were already PKE-free.

At peak use in 2013-14, PKE represented about 6 per cent of the average total diet of a Landcorp dairy cow. Last year that figure reduced to less than 4 per cent.

New Zealand is the largest user of PKE, importing about a quarter of the world's supply. Statistics NZ figures show imports peaked in the year to June 2015 at 1.94 million tonnes before falling to 1.86m/t in the year to June 2016.

"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," Grant Rosoman of Greenpeace said.

"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.

Fonterra imports a third of New Zealand's PKE supply through its subsidiary Farm Source.

Last year it advised farmers to use fewer palm kernel supplements because it said milk from grass-fed cows fetched a premium on world markets.

The dairy giant is recommending farmers feed a maximum of 3 kilograms of palm kernel supplement per cow per day. A spokeswoman said the advisory remained current.

Landcorp chief executive Steven Carden said one of the points of difference for New Zealand farming was its ability to grow grass and produce grass-fed animals. There was a growing interest in this food globally.

"Landcorp wants our partners and customers to know they can trust that we farm sustainably and care for the environment. We need to anticipate shifting consumer expectations on how their food is produced and change how we farm accordingly," Carden said.

There were obvious times and conditions such as winter and seasonal droughts that meant having alternative food sources to pasture was necessary. Landcorp would adjust its farming systems and use other, locally-sourced, feeds.

Carden said the shift to remove PKE from was expected to be virtually cost-neutral – "and we think there are significant longer term gains in terms of our ability to attract new premium customers."

Guy Salmon, the chair of Landcorp's independent environmental reference group, said the group welcomed the announcement.

"Landcorp is pushing itself to develop solutions to protect the environment that also make sense commercially."

Salmon said palm kernel 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.

The Green Party's Eugenie Sage called on Fonterra to follow Landcorp's example.

"It signals a very welcome shift by Landcorp to a more sustainable farming model and a recognition of the major flaws of ever increasing dairy intensification, for both the environment and farm profitability," Sage said.

Landcorp is a state-owned enterprise which runs 140 farms.