By Gyles Beckford and Shihar Aneez
WELLINGTON/COLOMBO (Reuters) - New Zealand-based dairy giant Fonterra Co-operative Ltd said on Sunday it had withdrawn milk powder under orders from the Sri Lankan authorities for showing traces of the toxic agricultural chemical dicyandiamide (DCD), although it disputed the accuracy of the testing.
It said two batches of milk powder had been removed from shops last month after Sri Lanka's Ministry of Health had said they tested positive for DCD, a nitrate inhibitor used in fertilizers. Sri Lanka also imposed a ban on advertising by Fonterra's Anchor powder brand.
But Fonterra's chief executive said the product was clean and safe and it was contesting the Sri Lankan results and the ban.
"We are definitely fighting it, because we have clear certificates - DCD-free, stamped, when it was exported, when it was imported - all clear," Theo Spierings told Television New Zealand.
He said Fonterra's own testing and that of independent bodies had shown the milk powder was safe.
Sri Lanka's Ministry of Health, however, said it has solid evidence to prove the presence of DCD.
"The tests were done by Industrial Technology Institute (ITI) of Sri Lanka and they have submitted a report on this. That is the evidence we have. We can prove it in the case of a legal battle," a health ministry official said on condition of anonymity.
The Sri Lankan recall follows last week's withdrawal by Fonterra and several of its customers of infant formula, sports drinks, and animal feed in nine countries because of fears of contamination of a whey ingredient with a bacteria that can cause botulism.
Spierings said Sri Lanka's action could be related to the price of dairy products there. Sri Lanka is the fifth biggest importer of Fonterra milk powder.
"There's always tension in the market because it's price controlled by the government, and dairy prices are at the high level. They want to support fresh farming, so there's always some tension there."
New Zealand Prime Minister John Key also doubted the accuracy of the Sri Lankan tests.
"The sort of numbers that they we're talking about were off the charts and just don't bear any resemblance to anything else we have ever seen," he told reporters, referring to Sri Lanka's tests.
In February, the presence of DCD in low levels in some Fonterra products was revealed, four months after the chemical was detected, causing widespread concern in China and Taiwan.
It is said to pose no health threat to humans in small quantities, but is no longer used in New Zealand fertilizer.
"We have been aware for some time that there has been discrepancies between the testing that has been done in New Zealand and what the Sri Lankan officials believe that they have tested for. I've got to say that we have tremendous confidence in our testing," Key said.
He also said details of an official inquiry into the cause and handling of Fonterra's botulism scare would be released on Monday.
Sri Lanka's efforts to popularize fresh milk to boost local production and achieve self sufficiency in the island nation in the past few years has helped to reduce imports of dairy products by 12.3 percent to $307.3 million in 2012.
Last year, the government ordered state-owned milk company, Milco, to buy all the farmers' unsold milk to improve self-sufficiency.
Milk production is also a political issue as President Mahinda Rajapaksa's main voter base is farmers, many of whom own dairy cows.
(Additional reporting Ranga Sirilal in Colombo; Editing by Robert Birsel and Jeremy Laurence)