Fonterra's surprise move to start monitoring every supplier's milk for palm kernel extract impact has bewildered farmers and led to accusations it is interfering in their farming systems.

The co-operative's out-of-the-blue advisory to farmers of a recommended guideline of 3kg maximum of PKE per cow per day also took the industry by surprise, with DairyNZ management kept in the dark.

PKE is produced from the mechanical extraction of oil from the fruit of the oil palm and is popular with dairy farmers as a cheap source of supplementary fibre, particularly in droughts and floods and when grass runs out. Feed industry figures show New Zealand imported 2.01 million tonnes of PKE last year, up 25.7 per cent on the previous 12 months. Of this, North Island farmers bought 1.6 million tonnes. DairyNZ said no data on average on-farm feeding levels of PKE was available.

In a letter to farmers, Fonterra said to future-proof its position as a trusted supplier of pasture-based milk it wanted to increase that value by ensuring milk came from predominantly grass-fed cows.

To achieve this it was establishing guidelines for the use of PKE, recommending a maximum of 3kg per cow per day.

"Currently, these guidelines are voluntary....." the letter said.

Baffled farmers were quick to wonder aloud if Fonterra would pay a premium for no or limited PKE use and if there would be demerits for higher than recommended use. They also questioned the logic behind 3kg.

Fonterra group director co-operative affairs Miles Hurrell said there was "a value proposition" in the move, but there was no current plan to segregate milk. He said PKE use had increased. "We want to ensure we are ahead of that and can protect the future of the cooperative we have at the moment."

On the possibility of demerits, he said none were planned "at this point in time".

Pressed, he said: "Anything is possible in future as we start to understand what our consumers want."

Hurrell said Fonterra had gathered some macro information about PKE use but would in the next few months start monitoring it farm by farm.

Asked for Fonterra's definition of a pasture-based system, he said: "We assume 18-20kg of dry matter is fed to a cow on a daily basis. We think 3kg (PKE) is a number that would still give us the benefit seen by consumers as predominantly being a pasture-based model.

"There is no globally-based number that talks to that, but we believe a guideline of 3kg a day versus a daily intake of 18-20kg ,,,supports the value proposition."

On whether Fonterra would impose PKE guidelines on its suppliers in other countries, Hurrell said PKE usage here was ahead of overseas. "But again with the products we sell, consumers demand to know what's in the milk, so we will be looking at our global milk pools and everything we do."

Farmers were also quick to question if Fonterra would introduce guidelines for other supplements.

Hurrell said this was not planned.

Federated Farmers was scathing of Fonterra's approach to farmers.

Dairy section chairman Andrew Hoggard, speaking from Europe where he is attending the World Dairy Summit, said the move was "very, very strange".

"It came out of the blue, there's been no consultation with anyone else in the industry. This is not just a Fonterra matter, it's an industry issue. It should have been discussed with all of us. Doing it on its own shows a level of arrogance.

DairyNZ spokeswoman Bernie Walsh confirmed senior management was notified at the same time as farmers and other stakeholders.

Hoggard said farmers needed firm price signals in this situation.

"I would understand that if we have a consumer perception issue, then we need to act on that, but how they've gone about it is really poor. "

Waikato Federated Farmers dairy chairwoman Jacqui Hann said Fonterra's PKE move seemed to have "been pulled out of a hat".

It had not been thought through properly, and the 3kg guideline was not logical, she said.

She had heard about the prospect of guidelines from the Fonterra Shareholders Council, she said.

Council chairman Duncan Coull did not return calls.

The country's second-biggest milk processor Open Country Dairy, which exports to 60 countries, said it had no knowledge of any market issue with PKE use.

"We are not aware of any issue at any point or time in connection with PKE. We don't think the rate of feeding is particularly high, though it varies at times," said chairman Laurie Margrain.

He said the company would look into the matter but saw no rationale for action.

Tatua Dairy Co-operative chief executive Paul McGilvary said his specialist product company was "neutral" on PKE.

"But we are not getting any particular pushback from the market re PKE."

DairyNZ strategy and investment leader for productivity Bruce Thorrold referred most questions back to Fonterra.

"They are the ones telling us the market has some value in it related to being a more pasture-based milk supply. That's a market question."

Asked what could be the science case for monitoring PKE levels, he said it was known that when cows were fed PKE, which comprised a mix of energy sources like fibre, protein and fats, the fat content of milk tended to increase.

On accusations Fonterra had pushed into DairyNZ territory, Thorrold said it was expected that processers, which sell into the market, would tell the industry what gains and premiums were available from the way milk was produced.

The relationship between all milk processers and their suppliers was their business, he said. DairyNZ's job was to help provide the science farmers needed to make good decisions "whether that is in the value chain, or on-farm".

"If it is a voluntary requirement we work with people to meet those, if it becomes compulsory, we do the same thing."

Waikato dairy farmer Garry Reymer said Fonterra was telling farmers "how to farm".

"This sort of stuff is dumb and poorly conceived. If Fonterra wants us to farm a certain way then it needs to put price signals in front of us. We have organic milk, winter milk contracts and guaranteed milk price contracts - farmers make their own economic assessments on these," he said.

This was an issue for the shareholder council to own, and Fonterra should have produced a proper discussion document and fed it back to farmers through the council, Reymer said.

"Did the council know this letter was going out? Did the board? I'm not opposed to it but they need to put a market signal in front of me. Put prices in front of farmers and let them decide. We don't need to be told how to farm."

Canterbury dairy farmer Mark Slee, a Fonterra supplier, said he did not have much of an issue with the action.

"If farmers are feeding over 3kg a day they have a major food shortage problem, that said, with irrigation down here, we don't have the same problems."

AgFirst consultant Phil Journeaux said he was surprised at Fonterra's move and was not sure how the company arrived at 3kg. Feeding PKE was the only way some farmers had survived the severe drought of 2008, he said.

Asked if the step could harm farm profitability, Journeaux said he would be concerned if limits became mandatory.

"If farmers are feeling the pinch it is cheap feed. If farmers are on System 4 or 5, chances are a reasonable proportion of their feed will be PKE."

Feed supplier, Waikato-based SourceNZ, said there was potential for a big lift in demand for PKE this season.

"With the continued low farmgate milk prices, farmers will switch to the cheapest feed supplement being PKE, including a move away from maize silage due to the cashflow implications with having to pay contractors growers large deposits before planting the crop, or incurring seed and fertiliser costs six months prior to harvest if growing their own maize crop," said managing director Warren Morritt.

He believed most farmers only feed about 3kg of PKE daily on average anyway, though at adverse times this level went much higher.