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UPDATE 2-Canada expects canola harvest to be smallest in 4 years on reduced plantings

Rod Nickel

plantings@ (Adds analyst comments on spring wheat, durum)

WINNIPEG, Manitoba, Aug 28 (Reuters) - Canadian farmers expect to harvest the smallest canola crop in 4 years due to reduced plantings, according to a government report released on Wednesday amid a diplomatic dispute between Canada and China, the top importer of the crop.

The spat, centered on the arrest of a Chinese executive in Canada and China's subsequent arrest of two Canadians, has curbed canola export sales since early this year and weakened prices just as farmers were deciding what to plant this spring.

Dry conditions threatened crops earlier, but timely rains in June and July boosted crop prospects, Statistics Canada said in its first production forecast.

Canola production looked set to reach 18.5 million tonnes, down 9% year over year, and below the average trade estimate of 18.9 million tonnes.

"It's a little shy of expectations, a little bullish," said Dave Reimann, market analyst at Cargill Ltd's grain marketing services division.

ICE Canada November canola futures traded 0.4% higher in early trading on Wednesday.

Farmers, however, tend to underestimate their harvests in summer when surveyed by Statistics Canada, and final crop figures in December are usually higher, Reimann said.

Higher prices would be welcome news for Canadian farmers, whose finances have been battered by China's snub of Canadian canola, soybeans and meat, as well as rising farm debt.

Statscan pegged the all-wheat harvest at 31.3 million tonnes, down 2.9% from last year due to a smaller harvested area. The average trade expectation was 32.3 million tonnes.

That figure includes a steep decline in output of durum, the wheat used to make pasta, but a large harvest of spring wheat, Canada's biggest crop.

Statscan pegged spring wheat production at 25.1 million tonnes, the largest in six years. Durum output of 4.4 million tonnes would be the smallest since 2011.

Bountiful spring wheat production adds "ammunition" for bearish investors in a well-supplied global wheat market, said Neil Townsend, senior market analyst at FarmLink Marketing Solutions. Minneapolis September spring wheat futures dipped 0.7% after the report.

The low durum forecast on the other hand appeared bullish for prices, he said.

Canada is one of the world's largest wheat exporters and the biggest shipper of canola, a cousin of rapeseed used largely to produce vegetable oil.

On the Grain World crop tour of western Canada earlier this month, scouts forecast a smaller canola crop of 19 million tonnes, higher than StatsCan's estimate. (Reporting by Rod Nickel in Winnipeg and Dale Smith in Ottawa Editing by Paul Simao and Chris Reese)