Fonterra and government officials are worried the discovery of chemical traces in milk could make international regulators and consumers reject New Zealand exports due to contamination fears.
The Ministry for Primary Industries on Thursday announced the suspension of products containing the compound dicyandiamide (DCD) after improved testing showed low-level residues were present in milk and milk powder.
The products are used by some New Zealand dairy farmers to lower nitrate emissions while growing more grass. Dairy makes up a quarter of all exports from New Zealand.
New Zealand's two largest fertiliser companies have suspended the use of known DCD products, as well as trying to identify all products that have DCD in them.
Dairy coooperative Fonterra is reassuring customers that there is no food safety risk from DCD.
Spokesperson Todd Muller told Radio New Zealand's Checkpoint programme on Thursday because the chemical is considered non-toxic, there are no international standards for DCD levels in food.
However, he said this could be a problem in itself for trading partners who have zero tolerance to detected residues outside agreed standards.
"In most cases, their standards are absolutely silent on this. So technically, you could be in breach of those standards should the DCD be even in very small traces in milk."
Mr Muller said food products are not at risk and the decision to suspend the use of DCD products is sensible.
The Ministry for Primary Industries says it supports the decision by fertiliser manufacturers to suspend sales of DCD until further notice.
Deputy director Carol Barnao told Checkpoint the ministry understands that consumers do not expect to have unwanted chemical residues in their food.
"The suspension will allow us to therefore investigate how and why these very low levels are getting in there, albeit that they are safe."
The ministry said though there may be some impact on a small number of dairy farms, the suspension is in the best interests of maintaining New Zealand's reputation as a quality food supplier.
The Labour Party says the Government should be fronting up about the potential trade implications of unwanted chemicals found in milk. Trade spokesperson Clayton Cosgrove said it needs to communicate with the public and the market.
"Perception becomes the truth. The key thing you've got to do (is) ... you have to get out the facts once they're known, and there's a lot of work being done around that obviously, and then you have to communicate using our diplomatic posts."