Fonterra has launched an internal review after people in China were arrested for selling milk powder that should have been destroyed.
They said the milk powder was being sold by a Shanghai-registered trading firm, Jiang Di International Trade Company. By Sunday evening, Jiang Di had already repackaged and sold nearly 170 of the 276 tons of milk powder online and through other retailers at a cut price.
Fonterra said the powder was not sold directly to Jiang Di, but to an authorised reseller who onsold it, and that it could have been sold again and again before reaching Jiang Di.
Kelvin Wickham, who manages Fonterra's Milk Products brand and is the former head of its China operation, said the company had rules for on-selling, but they only went so far.
"As far as we're aware, our reseller's done everything we'd normally ask them to do in terms of precautions and ensuring the product isn't used incorrectly," he said.
"Clearly it's ended up somewhere in the supply chain where it's become aged, beyond the best-before date, and someone's decided to criminally try and profit off that expired product."
Fonterra had not yet had an opportunity find out exactly which milk powder product was involved, Mr Wickham said.
"I think it's an isolated case but clearly we've seen such incidents occur in the past as well," he said.
"People had tried to forge our products, forge our packaging and present [fake] Fonterra products as legitimate when that's not the case."
It was being sold into the trade market so was likely to have found its way into the food chain, in bakery products.
Mr Wickham said Fonterra would now look at what more it could have done to prevent the repackaging.
Deputy Prime Minister Bill English said the seizure of expired milk powder in China showed food safety rules are being strengthened there.
The discovery would not be a significant challenge for Fonterra, he said, as no-one connected with the company is implicated.
New Zealand products 'open to abuse'
China investment specialist David Mahon, who has worked with Fonterra in the past, said premium products, such as New Zealand milk, were open to abuse.
"The issue to look out for [is whether] will anybody get sick from this product," he said. "It's an outside chance but if that happens there may be a New Zealand issue to deal with."
"Chinese consumers are well aware that quality products are often counterfeited."
In 2008, six babies died and 300,000 were affected by melamine-contaminated baby milk powder produced in China by Sanlu, a company in which Fonterra had a significant stake.
A year later, China introduced new food safety regulations and harsher penalties, but the rules were not well-enforced.
Mr Mahon said that appeared to be changing.
"There are now very heavy prison sentences for people who are involved in adulteration or contamination of food, so a lot more resource is put into this because the government has been embarrassed by the major scandals," he said.
"[The Chinese government is] very keen to make sure they do all they can," he said.
Federated Farmers dairy chair Andrew Hoggard did not think New Zealand's reputation would be tarnished by the milk powder issue.
"I'd seriously doubt anyone in China would be saying 'bad New Zealand' over this," he said.
"We've sold product that's been correctly labelled. What's happened ... you can't bring that back to blame on New Zealand."
Minister for Primary Industries Nathan Guy was unavailable for comment. His office said it was a domestic matter for the Chinese government.