Fonterra is to cut by half the number of its organic milk suppliers in the North Island.
The company says it remains committed to organics, but the growth in export sales of organically produced milk products has slowed since the global financial crisis.
Supply director Kelvin Wickham says that as a result of the downturn, the organics sector of the business is losing money and will continue to do so unless changes are made.
He says research shows consumers are more confident that conventionally grown food is being produced more sustainably and they no longer feel the need to pay a premium for organically grown food.
Mr Wickham says Fonterra will hold meetings this week with organic dairy farmers to discuss its plans for the sector.
It intends concentrating organic milk processing in the North Island at Hautapu near Hamilton, focusing on producing the type of cheeses which make the most money, and concentrating sales efforts in Asia, Australia and New Zealand.
Mr Wickham says focusing organic milk processing through a single site will reduce transport and manufacturing costs.
The Green Party says Fonterra's decision will cripple the organic dairy sector.
Agriculture spokesperson Kevin Hague says the company is using its monopolistic power in a way which will massively disadvantage farmers and reduce consumer choice.
Federated Farmers organic dairy spokesperson Gray Beagley says the decision comes as a bolt from the blue and leaves many farmers in the lurch.
He questions how hard Fonterra has worked to develop new markets locally and overseas for organic milk products.
Mr Beagley said Fonterra appears to be backing away before the point where it was due to start breaking even.
'Sacrifice' for GE products
An organic product lobby group says Fonterra is sacrificing organic milk production to limit opposition to genetically-engineered products.
The Soil and Health Association says organic farming has been identified as the main obstacle to GE farming because contamination would hurt the sector.
It says Fonterra has realised it can't have both organic and genetically engineered products and is sacrificing one for the other.
Meanwhile, a Lincoln University professor believes the decision to cut back on support for organic farming could be short-sighted.
Caroline Saunders, a professor of trade and environmental economics, says Fonterra is pulling back because the market for normal milk is so strong and the demand for organics has taken a dip.
Professor Saunders says the market for organic products is already showing signs of recovery and the cuts will reduce New Zealand's ability to fill increasing demand in future.