Fonterra has been told a product it imports from Germany has tested positive for the chemical, melamine.
The dairy giant says it plans to replace the tainted iron supplement with a product from the same company.
Fonterra uses very small amounts of the iron supplement, from the German-based company Budenheim, in 12 fortified whole milk powder products.
The dairy co-operative says no melamine has been detected in any of its product, which is all exported to countries in Asia, Africa, the Middle East and Latin America.
Fonterra says there is no risk to consumers, and there are no plans to recall its milk powder products.
It's immediately stopped all production using the supplement and is sourcing a replacement product.
Fonterra's general manager of Manufacturing and Supply Chain, Gary Romano, says the replacement will also come from Budenheim.
"They (Budenheim) are ensuring that it is melamine free but we will also do our own testing of the ingredient as well as the final product prior to using it as an ingredient in further manufacture," he said.
Fonterra has isolated 23,000 tonnes of its milk powder product, with each batch being reviewed before exported.
The Food Safety Authority says although the product is imported from Germany, inital reports suggest the melamine contamination occurred accidentally at a manufacturing plant in Spain.
Last year, six children in China died and nearly 300,000 people became ill with kidney stones and other kidney-related illnesses from consuming milk powder tainted with melamine.
The scandal forced the bankruptcy of the Sanlu Group, which is part owned by Fonterra.
Since then, the dairy company has asked more than 100 suppliers for assurances that no melamine is used in their products.
China sentenced two people to death last month for their part in producing or selling milk adulterated with melamine.
