Taranaki farmer Matthew Grayling was shocked to receive a 'D' grade after feeding his animals a small amount of palm kernel.

Palm kernel expeller (PKE) imports have hit record levels, despite the fact dairy farmers will be penalised from September 1 for feeding their cows excessive quantities.

At the same time import prices have soared by 25 per cent to $337 million for the year to May, compared with $260m the year before.

The amount of PKE imported for the year to May was 2.2 million tonnes, compared with 2.1 million tonnes in 2016-17.

SUPPLIED Last year's high rainfall followed by drought has meant farmers have had to use supplements to feed their cattle.

The latest figures are bound to reignite controversy over the role PKE is playing over rainforest destruction. Palm kernel is a by-product of palm oil production.

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Fonterra and its joint venture partner Wilmar, through their company International Nutritionals, is responsible for importing about 30 per cent of the PKE used in New Zealand. Wilmar has links with a company implicated in deforestation in Indonesia to make way for palm oil plantations.

Greenpeace spokeswoman Gen Toop said Fonterra had made promises to stop any involvement in deforestation but had failed to deliver.

"So we'd like to see the Government step in and stop the import of PKE."

Federated Farmers dairy chairman Chris Lewis said prices had risen because of high demand for the feed in Europe, where there has been extensive drought.

"I was paying $220 per tonne last year but that's up to over $300 today. I myself have increased my use of PKE, and so have farmers in a few regions because poor weather has affected grass growth," Lewis said.

Last year rainfall was above average in many districts, which was followed by drought during summer.

"If you're not growing grass, you've got nothing to feed and have to fall back on supplements, because the public doesn't support animals being in poor condition."

Asked why farmers did not use New Zealand-grown grain, Lewis responded that it was largely grown in the South Island and bought by South Island farmers.

There was a shortage of land in the North Island to grow grain, and new water plans did not always allow it to be planted.

He said some farmers would struggle with the milk composition protocol demanded by Fonterra, which the dairy giant has introduced so it can manufacture added-value products.

A Fonterra spokeswoman said the fat evaluation index (FEI) grading system it was introducing at the beginning of September was designed to help farmers understand the impact of a variety of factors on their milk's fat composition, rather than specify what feed or how much of it they could use as this would differ from farm to farm.

"While over 80 per cent of feed used annually is pasture-based, supplemental feeds are required, especially during challenging weather events. PKE makes up less than 5 per cent of feed used annually."

When the FEI was first mooted, Fonterra recommended a level of 3 kilograms of PKE per cow per day.

Dairy NZ said pasture growth last year had been erratic across most of the country, with spring conditions being poor in most places. While summer growth was better, it was of lower feed quality, so farmers may have chosen to keep some additional PKE in the system.

Meanwhile a shipment of PKE from Indonesia has been found to have unidentified beetles on board, which the Ministry for Primary Industries said could have been from Indonesia or New Zealand.

The vessel had first unloaded some PKE at Timaru where nothing was discovered before arriving at Marsden Point where the beetles were found.

As a precaution the cargo of PKE was fumigated. The importer Agrifeeds said the feed was cleared by MPI and was subsequently distributed to Agrifeeds customers.