Fonterra Cooperative Group is for the first time offering its organic dairy farmers a payout based on market returns in a bid to boost organic supply.
It's the third time in a year the cooperative has reviewed the way it pays organic farmers.
It is offering organic farmers a choice for the 2016/17 season starting in June, of either a payout based on a share of the market returns or the existing payment based on a $1.75 premium to the forecast conventional farmgate milk payout, which is currently $4.15 per kilogram of milk solids.
The move comes at the request of organic farmers, many of whom want a greater share of returns from the value-add products, although they are also open to greater risk if demand and prices go down.
Craig Deadman, Fonterra's global business manager organics, said organic milk products are providing high value returns for the cooperative and the new payment model reflects the additional costs and efforts farmers make to produce premium organic milk.
"Linking the organic milk price to organic market returns will help us increase the number of organic farmers," he said.
That number has dropped to 60 from 73 in the past year, after the establishment of rival Organic Dairy Hub last year, which so far has 15 suppliers, some of whom also supply Fonterra.
Organic milk comprises less than 1 per cent of Fonterra's milk supply. Its organic milk strategy, released last year to show farmers the cooperative was committed to the business, aims to increase supply to 600,000kg/MS by 2020.