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* Treasurer Hockey rejects offer on national interestgrounds
* Grain growers worried about foreign ownership of key eastcoast handler
* GrainCorp shares fall by a quarter to below pre-bid levels
By Lincoln Feast and Colin Packham
SYDNEY, Nov 29 (Reuters) - Australia rejected a A$2.8billion ($2.6 billion) takeover of GrainCorp by U.S.agribusiness giant Archer Daniels Midland (ADM) onFriday, bowing to pressure from grain growers in a rare andsurprising decision.
GrainCorp shares plunged, losing a quarter of their value,as the rejection by Treasurer Joe Hockey effectively ring-fencedAustralia's last major independent grains handler from anytakeover.
The deal had been seen as the first test of the conservativegovernment's vow that Australia was "open for business" afterthe victory of Prime Minister Tony Abbott in Septemberelections.
"It would have been great consolidation for ADM andbeneficial for Australian farmers and the grains industry. It'sa pity it did not get through," said Vijay Iyengar, managingdirector of Singapore-based trading company AgrocorpInternational. "The food sector is always very sensitive."
Hockey said he was rejecting the proposal on nationalinterest grounds after Australia's Foreign Investment ReviewBoard (FIRB) failed to reach a consensus recommendation.
"Many industry participants, particularly growers in easternAustralia, have expressed concern that the proposed acquisitioncould reduce competition and impede growers' ability to accessthe grain storage, logistics and distribution network," Hockeytold reporters in Sydney.
The rejection is a blow to ADM, which is more U.S.-focusedthan rivals Cargill, Bunge and Louis Dreyfusand had wanted to improve its access to fast-growing Asianmarkets.
Both ADM and GrainCorp expressed disappointment at thedecision, which would deny the country's agricultural industrysignificant capital investment, said GrainCorp Chairman DonTaylor.
Shares of Decatur, Illinois-based ADM were down 2.4 percentat $40.49 by 10:50 a.m. CDT (1650 GMT) on Friday.
GrainCorp shares slumped to a low of A$8.25, below itspre-bid level. The company has been diversifying its business,but earnings are under pressure from lower grains harvests. Thestock closed down 22 percent at $8.72.
"The recent numbers from GrainCorp look pretty scary. So myfeeling is the downside on GrainCorp is a lot lower than what itwas trading at before this was announced, so really bad news forshareholders," said Shannon Rivkin, a director at RivkinSecurities.
ATTRACTIVE ASSETS
Australia is the world's second-largest wheat exporter andGrainCorp is the largest listed grains company, handling about athird of the country's wheat production.
It dominates the country's east coast storage, distributionand marketing of grains, handling 85 percent of easternAustralia's exports.
The deal had previously been approved by Australia'scompetition regulator and analysts had expected it to proceed.
But it was unpopular with farmers and many voters and hadstoked divisions between the Liberal Party and its juniorpartner, the rural-based National Party.
"Political expediency has overruled rational thought, in ourview, with the treasurer succumbing to political pressure fromthe National Party, rural members of the Liberal Party andgrower groups," JP Morgan analyst Stuart Jackson said.
ADM could use partnerships with GrainCorp to buildrelationships with Australian farmers and "go some way tomeeting its objectives in securing a competitive position inaccumulating east coast grain," Jackson said.
Farmers were sceptical of another foreign deal in the grainsindustry after Canadian agribusiness Viterra in 2009 purchasedABB Grain, then Australia's largest agribusiness. Many SouthAustralian farmers have complained about higher prices and longwaiting times to deliver grain.
Glencore Xstrata Plc, which purchased Viterra in2012, was not immediately available for comment.
"All the way along we wanted ADM to show us how growerswould benefit and no one could," said Dan Cooper, a farmer inNew South Wales and committee chair at the NSW FarmersFederation.
Only a handful of foreign investment deals are rejected byAustralian authorities each year and ADM's tilt at GrainCorp isfar from the first foreign deal in the agriculture sector.
Hockey said the deal was the only one of 131 significantforeign investment applications that had been rejected since hetook office. The last major foreign investment blocked wasSingapore Exchange Ltd's $8 billion bid for ASX Ltd in 2011.
"People will interpret this as maybe Australia is not so'open for business'," said Shane Oliver, head of investmentstrategy, AMP Capital Investors. "But I think it's a one-off andwill not set a precedent."
Hockey said he was open to ADM - one of the four "ABCD"firms that have dominated the global agricultural business fordecades - increasing its stake in GrainCorp to nearly 25percent. ADM said it would consider an increase.
The GrainCorp takeover was still awaiting approval fromChina, which this year imposed stiff conditions on Japanesetrading house Marubeni Corp's $5.6 billion purchase ofU.S. grain merchant Gavilon amid anxiety over food security.
ADM's bid is part of a wave of international interest inAustralia's agricultural industry. Most recently Australia'sWarrnambool Cheese and Butter Factory Company Holdings Ltd has sparked a bidding war involving Canada's Saputo Inc, which has already won FIRB approval.
U.S. wheat has lost about a quarter of its value sinceADM first expressed interest in GrainCorp in October last year.A rebound in global production is weighing on prices.
ADM was advised by Citi and Barclays, whileCredit Suisse and Greenhill advised GrainCorp
