Research by scientists at the University of Otago suggests the agri-chemical DCD which is causing trade headaches for the dairy industry may also be causing damage in waterways.
Dr Marc Schallenberg, research fellow at the university's Department of Zoology, says he has been looking into DCD for several years.
He said when the chemical is applied to soil it prevents the natural nitrification process which is useful on land.
But he said DCD does the same when it gets into waterways where nitrification is valuable as it converts ammonium, which is toxic to many aquatic organisms, to nitrate.
Dr Schallenberg said he carried out an experiment that confirmed DCD blocked the conversion process.
He said he found DCD residues in streams in Otago's lower Taieri Plains and research on a larger scale needs to be done.
Last week, Fonterra announced that residues of DCD had been found in its milk in September last year.
Westland Milk Products has since said tests it carried out after the Fonterra announcement revealed minute traces of DCD in samples produced prior to 1 November last year, but not in more recent samples.