A disappointing Canadian canola crop is setting up a tug-of-war between domestic crushers and exporters over supplies, with global vegetable oil markets already stretched tight by a drought-damaged U.S. soybean crop.
Canadian farmers were expected to shatter the record for canola production and harvest 15.4 million tonnes of the oilseed in 2012-13, according to Statistics Canada's estimate last month.
But a mid-summer heat wave, disease and a recent windstorm that flung around entire rows of swathed canola have chopped industry yield and harvest estimates dramatically.
The crop may still be bigger than last year's record 14.5 million tonnes, but crushers and exporters expected more, after both groups set records in 2011-12.
"I think exports are going to suffer," said Don Roberts, analyst at CanolaInsight.com.
Canada is the world's biggest producer and exporter of canola and its shipments make up some two-thirds of the global trade.
Selling canola's processed products -- oil to make vegetable oil or biodiesel and meal to feed livestock -- is more lucrative than canola seed itself, and some crushers such as Cargill and Viterra are also seed exporters.
Crushers will be keen to sell canola oil to U.S. biodiesel makers because the competition, soybean oil, is in tight supply after the U.S. drought, Roberts said.
The U.S. Environmental Protection Agency this month boosted its mandate for biofuel production in 2013 to 1.28 billion gallons, up from this year's one billion gallons.
Roberts sees Canadian canola seed shipments dropping off to China, last year's top export market, and the United Arab Emirates. China may import more canola oil instead, he said.
Japan and Mexico, usually among Canada's top three export markets, are steady canola buyers.
Canadian crushers have expanded rapidly in the past several years to keep pace with rising canola production. Canada crushed about seven million tonnes of canola in 2011-12.
Lach Coburn, West Coast manager for Cargill, sees a strong fall canola export season getting underway, and expects domestic crushing also to remain brisk.
The market has longstanding commitments to service in addition to new business currently on the books, he said.
Although ICE canola futures prices are relatively high, despite dropping to a four-month low this week, overall demand isn't likely to drop this early in the crop year, Coburn said.
"What is produced and comes to market will find a home. However with the expected reduction in production versus expectations earlier this summer, we will not be able to meet the demand from all markets as we move deeper into the crop year."
Hamburg-based analysts Oil World said Tuesday that Canada's canola crop would amount to 15 million tonnes, still higher than the previous year.
But Canadian canola exports are likely to fall to 7.85 million tonnes from 8.7 million tonnes the previous year, Oil World said, even as global buyers like China were regarding Canadian canola as an alternative to tight global soybean supplies.
"We were already looking at a demand-bull market in canola even with a record crop and now it looks like there will have to be some cutbacks," said Anne Frick, senior oilseed analyst at Jefferies Bache in New York. "It could come out of (Canadian) exports."
Oilseed market conditions have largely been set by drought hitting soybean production first in South America, then in the U.S. Midwest.
Australian canola production also looks lower than the previous year, while India's rapeseed crop might be helped by recent monsoon rains, Frick said.
"I think the market will be tight, definitely," Frick said.
Statistics Canada will provide its next estimates of crop production on Oct. 4, based on a farmer survey in early September.
-- Rod Nickel
writes for Reuters from Winnipeg.