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UPDATE 2-Whoops! Last-minute change to U.S. tax overhaul splits grains sector

(Adds comment from Senator Roberts)

By Tom Polansek

CHICAGO, Jan 12 (Reuters) - Republican U.S. senators are
working with some of the world's biggest agricultural merchants
to undo a last-minute provision in the tax overhaul that
threatens to distort the grains market and starve private firms
of corn, soy and wheat supplies.

It was included during final revisions of the tax bill that
passed the Republican-controlled Congress last month. The
restructuring of the tax code, the biggest in 30 years, handed
President Donald Trump his first major legislative victory since
taking office.

The provision gives farmers a 20 percent deduction on
payments for sales of crops to farmer-owned cooperatives, but
not for sales to private or investor-owned grains handlers such
as global firm Archer Daniels Midland Co.

The modification was introduced to compensate co-ops and
their farmer owners when Congress eliminated a part of the tax
code, known as Section 199, which had benefited them for more
than a decade.

Republican Senators John Hoeven of North Dakota and John
Thune of South Dakota are among the lawmakers whose offices said
their attempt to create an equivalent to the old tax code had
backfired by incentivizing sales to co-ops at the expense of
others in the market.

"Sen. Thune is now aware of the unintended situation this
new provision could create in the agriculture industry," his
spokesman Ryan Wrasse said in a statement. He added that Thune
believes tax laws should not sway where farmers sell their
harvests.

The government wants to correct the disparity, and the U.S.
Department of Agriculture said on Friday it expects a solution
to be forthcoming.

"The federal tax code should not pick winners and losers in
the marketplace," Greg Ibach, an undersecretary at the USDA,
said in a separate statement.

ADM and Cargill Inc, two of the world's top
agricultural traders, joined talks with Hoeven, Senate aides,
and trade associations that represent co-ops and private firms
to come up with a way to even the playing field. Representatives
of grain companies and lawmakers met in Washington twice this
week in a sign of the urgency of the matter.

If legislators do not address the provision by the autumn
harvest, private grain companies could lose out on deals to buy
billions of bushels of corn and soybeans. Farmers already are
looking at how they can transfer grain stored at private
elevators to co-ops to take advantage of the new law.

"It's a massive issue for people like us, ADM, Cargill, all
the private ethanol buyers and on and on and on," said Dale
Beyer, chief financial officer for Minn-Kota Ag Products, a
private grain handler in Minnesota.

Thune and Hoeven began hearing in early January that the
provision would influence where farmers sell their products,
according to the National Grain and Feed Association, a trade
group that has met repeatedly with the lawmakers' aides this
month to discuss the issue.

The association told members in an email that it learned of
the provision in late December, after it was included in the
final version of the tax law, and immediately asked tax experts
for advice. The group then met with Thune and Hoeven staffers to
learn why the senators included it in the law.

The association, in a separate statement with the National
Council of Farmer Cooperatives, said it was working with Hoeven,
Thune and Senator Pat Roberts of Kansas, also a Republican, to
reach "an equitable solution" that preserves benefits formerly
available to co-ops under Section 199.

"It’s disappointing to learn a provision in the tax reform
bill is distorting the grain markets," Roberts said in a
statement. "The authors of the measure did not intend that
outcome."

TENSIONS RISE

The grain sector is struggling with low crop prices
following years of big harvests and is paying close attention to
the tax law after support from rural communities helped propel
Trump into office in 2016.

On Monday, the president said farmers would score big from
the overhaul.

"It’s a total of $5.5 trillion in tax cuts, with most of
those benefits going to working families, small businesses, and
who? The family farmer," Trump said in a speech to the American
Farm Bureau’s annual convention in Tennessee.

Farmers generally decide to whom they want to sell their
grain based on the prices offered by different handlers, how
close they live to delivery sites and personal affiliations.

However, the wording of the new provision wrongly assumes
that all farmers deliver their grain to co-ops, said Bob
Zelenka, executive director of the Minnesota Grain and Feed
Association, a trade group that represents co-ops and private
companies.

"It tells me that someone who wrote this is unused to how
things work in the ag industry," he said.

Efforts to adjust the provision have some co-ops pushing
back out of concerns farmers could lose tax benefits.

Chris Pearson, chief executive of the South Dakota Wheat
Growers co-op, said on Twitter on Wednesday that the law "gives
farmers some nice tax advantages when doing business with the
ORGANIZATION THEY OWN!"

Pearson did not respond to calls and emails seeking comment.

"I would hate to see private companies raise our farmers'
taxes!" he tweeted on his account @CEOWheatGrowers.
(Additional reporting by Mark Weinraub in Chicago and David
Morgan in Washington; Editing by Simon Webb, Paul Simao and Nick
Zieminski)

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