* W.Canada canola wheat, canola crops seen larger

* Corn prices hit record after USDA cuts harvest view

* Canada wheat displacing corn in Texas feedlots

By Rod Nickel

WINNIPEG, Manitoba, Aug 12 (Reuters) - After spring floods drowned his seeding plans two years straight, Canadian farmer Walter Finlay is harvesting what looks to be an average or slightly better crop of wheat and canola.

Average will do just fine this year.

The worst drought in a half century in the U.S. Midwest has scorched corn and soybean crops, igniting grain and oilseed prices and leaving farmers in Western Canada poised to profit nicely off the misery of U.S. growers.

"You hate to see anybody have a hard time," Finlay said from his farm near Souris, Manitoba. "There maybe is better opportunity just because of what's going on in the States ... the price of corn has obviously drawn the price of feed wheat up."

Canada is the world's seventh-largest, wheat-growing country, and the top exporter of spring wheat and durum, used in baking and pasta-making respectively. It's the biggest producer and shipper of canola, used to make oil for salad dressings and margarine.



Canadian farmers will harvest a record-smashing 16 million tonnes of canola this year, and the biggest wheat crop in three years, according to a July poll by Reuters of traders and analysts.

Already farmers are finding new markets for their crops, as Canadian wheat replaces scarce U.S. corn in feedlots, coming to the rescue of livestock and poultry industries that are scrambling to feed their animals. Oilseeds users are also looking to plentiful canola rather than soybeans.

"I certainly know buyers of feedstocks are looking wherever they can in the world to find it," said Sam Miller, managing director of agriculture at BMO Harris Bank.

The western prairie provinces, Canada's main crop growing area, got generally favorable weather after spring rains left soil wet enough to limit damage from summer heat. In the U.S. Midwest, corn and soybean ratings are the worst since 1988.

"Canadian farmers facing better conditions will really cash in," said Earl Sweet, senior economist at BMO Capital Markets.

The U.S. Department of Agriculture on Friday cut its estimate for the U.S. corn crop more than expected, to the smallest corn harvest in six years, a report that pushed corn prices to a record high before investors took profits.

The reversal of fortune for oft-flooded growers like Finlay comes as Western Canadian farmers have a dizzying number of sales options for wheat after the Canadian Wheat Board's monopoly ended this month, and it has the potential to upset the natural order and patterns of world grain trade.

Already, feedlots in Texas are taking the rare step of buying usually much higher-priced Canadian wheat to fatten cattle, given limited supplies of U.S. corn available.

Southeastern U.S. chicken producers are looking to import corn from Brazil, while feedlots in the U.S. plains are looking to Canada for wheat and to Brazil and Argentina for corn as substitutes for U.S. corn, Miller said.

Canadian canola also stands to steal some sales from U.S. soybeans, their oilseed competitor in the global vegetable oil market, with the USDA forecasting the lowest U.S. soybean exports in seven years for 2012/13.

Canada should export a record volume of canola, and some of those sales will likely come at the expense of U.S. soybean exports, said Anne Frick, an analyst at Jefferies Bache in New York.

Canadian canola crushers, who include Viterra Inc, Richardson International Ltd, Cargill Ltd, Archer Daniels Midland Co, Louis Dreyfus Corp and Bunge Ltd, processed a record volume of canola last year.

The drought is likely to drive up demand from U.S. biodiesel makers for Canadian canola oil in place of soyoil, and boost canola seed imports by traditional buyers like Mexico, Frick said.

But export demand for canola depends also on the overall vegoil market, especially supplies of palm oil, and on the next South American soy crop, said Don Roberts, analyst at Canolainsight.com.


NOT A 'BIN-BUSTING YEAR'

But yields and weather will determine if Canadian exporters can fully claim the spoils of drought.

While farmers expect a record-setting canola harvest overall, early yield reports are mildly disappointing. Manitoba canola yields range widely from 20-40 bushels per acre, compared with last year's average 33.8, after July heat scorched some fields.

"Everyone, myself included, was thinking it was going to be a bin-busting year," said Angela Brackenreed, an agronomist for Canola Council of Canada. "It is a little bit disappointing, but you can't tell Mother Nature what to do."

The chance of Canadian wheat exporters filling U.S. demand for livestock and poultry feed depends on how much of the crop comes in below the standard for millers, who pay more than feedlots.

Western Canada's wheat is looking good, but little of it is in the bin, leaving it vulnerable to late-season rain or frost that can lower the quality to feed use, said Neil Townsend, director of market research at grain marketer CWB.

"I would say we won't have a huge supply of feed wheat, but it's just a matter of pricing," he said. "Most of it should go into food channels but you never know."

Kansas City nearby wheat is currently at a premium of about 80 cents to corn, around the lowest level in three weeks, making wheat a more affordable feed option than usual.

While Western Canadian farmers are sitting pretty, growers in the eastern province of Ontario, who produce most of Canada's corn and soybeans, have coped until recently with hot and dry conditions of their own.

Agriculture and Agri-Food Canada said last month that the country would be a net corn exporter in 2012/13, a rare occurrence that made headlines in 2011 when Canada shipped corn to Spain.

But a summer heatwave in Ontario shriveled both harvest and export prospects, said Todd Austin, marketing manager at Grain Farmers of Ontario, and will likely keep them from capitalizing on the U.S. crop disaster.

Back on Walter Finlay's Manitoba farm, sympathy for Midwest farmers is tempered by the stinging memory of last year's Canadian floods.

"They have had high prices the last two years when we had no crop," said Finlay. "I would say it's Western Canada's turn."

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