UPDATE 2-Fonterra suspends Sri Lanka operations after milk powder protests

Fri Aug 23, 2013 2:44am EDT

* Fonterra disputes accusations of tainted products

* Suspension follows Sri Lanka protests against Fonterra milk

* Analyst: Backlash in Sri Lanka driven by 'industry politics'

By Naomi Tajitsu and Shihar Aneez

WELLINGTON/COLOMBO, Aug 23 (Reuters) - New Zealand dairy giant Fonterra Co-operative said on Friday it had suspended operations in Sri Lanka after the world's largest dairy exporter faced product bans, court cases and angry demonstrators over its milk products in the country.

Earlier this week, it was banned by a Sri Lankan court from selling or advertising its products after the country's food safety authorities said they found high levels of the agricultural chemical dicyandiamide (DCD) in two batches of milk powder it tested. Fonterra vigorously disputes the finding.

Four of Fonterra's top officials have since been charged with contempt of court for failing to adhere to the bans, while a Sri Lanka state institute said it would test all milk powder in the market.

The debate triggered an angry demonstration on Thursday.

More than 100 members of a hardline nationalist party in President Mahinda Rajipaksa's ruling coalition gathered outside Fonterra's regional offices near Colombo to demand a ban on the company's products in the country as riot police looked on.

"The temporary suspension is the right thing to do. It is a precautionary measure to ensure our 755 people working there are safe," Chief Executive Theo Spierings said in a statement.

"Recent events, however, have made it difficult to maintain day-to-day operations, and we need to get them resolved."

Speaking to Radio New Zealand, he added that it was unclear when operations would resume in the country.

"We need to have a talk about the situation," Spierings said. "We need to be seen as a sustainable partner in the country, we need to have those discussions before we continue our operations."

Fonterra's critics in Sri Lanka on Friday said the protests were prompted by the company's disregard for legal rulings.

"We did not request Fonterra to close down. What we wanted is to make sure that Sri Lankan people, mainly the children, do not get DCD contaminated milk," said Saman Rathnapriya, a leader of the National Health Services Union, the main petitioner for the ban on the company's products.

"The public protest could have been prevented if Fonterra had acted according to the court ruling and stopped its distribution and misleading publicity."

The action in Sri Lanka follows a global food scare after Fonterra said that some of its products could contain a bacteria that can cause botulism. Its products have been removed from shelves in around nine countries, including China, while other countries have restricted imports.

Shares in Fonterra's tradeable investment fund closed 0.43 percent lower on Friday.

'INDUSTRY POLITICS'

Fonterra has had a presence in Sri Lanka for around 50 years, and its Anchor brand commands a 65 percent market share of the country's milk powder industry.

In New Zealand, Sri Lanka's actions are widely seen as a move to pressure Fonterra and promote local dairy farmers.

"There clearly are industry politics going on over there," said Keith Woodford, professor of Farm Management and Agribusiness at Lincoln University. "There's no doubt that Sri Lanka wishes to have its own dairy industry."

Sri Lanka is a top-10 importer of New Zealand dairy products, with roughly $196 million of the country's total milk powder imports of around $300 million coming from New Zealand last year. The majority is supplied by Fonterra.

Milk powder exports to Sri Lanka account for roughly 2 percent of New Zealand's overall dairy exports.

Sri Lanka has been trying to promote consumption of local fresh milk to stem capital flows out of the country and increase the viability of domestic farmers.