Fonterra will no longer accept milk from new farms that have converted marginal land into dairy pasture using oil and gas drilling waste.
Waste made up of ground rock, drilling mud, and lubricant fluids is increasingly being dumped in the practice known as 'land farming'.
The sludge is trucked to about a dozen sites in Taranaki, stored in pits to let petrochemicals settle before being spread thinly across the land where it is covered and becomes pasture.
Fonterra currently collects milk from six farms that have spread petroleum-tainted mud, but says it won't take on any more farms.
The company said the cost of specially testing the milk for petroleum contaminants is too high, about $80,000 per year, and the testing is more trouble than it's worth.
Taranaki Regional Council backs the use of the waste spreading saying it is strictly monitored and the drilling muds improve coastal sandy soils for productive farming.
Fonterra said it made the decision several months ago. The perception of a safe clean dairy industry was also a factor.
Federated Farmers said Fonterra has taken the easy way out in refusing to take milk from farms spreading their land with oil and gas drilling waste.
Taranaki dairy spokesperson Bryce Kaiser said petroleum breaks down naturally over time and once the land is proven safe, further tests shouldn't be needed.
He believes other contaminants on farms, such as rubbish dumps, have a far worse effect than the drilling muds.
Mr Kaiser said Fonterra has taken a knee-jerk reaction to concerns over the practice.