Trade players and international consumers are slowly coming to grips with the implications of a falling crop production outlook in the world's biggest canola growing and exporting nation.

Canadian farmers have increased the area planted to canola from 8.32 million hectares in 2020 to nine million hectares in 2021.

But the yield projection for their crop is falling rapidly.

Subsoil moisture was low from the outset of sowing across much of the Prairies region, due to below average rainfall during the past 12 months.

The crop was planted into a good seedbed in most instances, but a dry spring and extreme temperatures are swiftly taking their toll.

In last week's World Agricultural Supply and Demand Estimates (WASDE) report, the US Department of Agriculture (USDA) pegged Canadian canola production at 20.2 million tonnes.

This was only slightly down from its June crop estimate, and much higher than local trade predictions - most of which are below 19 million tonnes, and some less than 16 million tonnes.

MarketsFarm's Mike Jubinville said last week that the USDA was "out to lunch on Canada".

That statement could also be applied to the USDA's throw at the dartboard for its estimate of Australian canola production this season.

It landed on 3.7 million tonnes, which was up just 0.2 million tonnes from its June estimate. But it was well behind domestic predictions, many of which now exceed 5 million tonnes.

The Australia Oilseed Federation's May crop report pegged the planted area of the oilseed at 2.87 million hectares, which is up 25 per cent from the 2020 area.

It said Australian farmers reaped a record 4.28 million tonnes of canola last harvest.

Since then, winter crop growing conditions in the nation's two major producing states of Western Australia and New South Wales have been exceptional.

If anything, there may be some areas in these states that are suffering from excessive moisture.

Despite this, WA and NSW are expected to have bumper crops.

The gains in each of these states is more than making up for any losses in Victoria and South Australia, which have been on the dry side since crop planting.

Canada's contribution to global canola supply is significant.

A reduced crop there in 2021 will have substantial ramifications for international trade and oilseed prices - as the market demonstrated in the first half of July.

In the past five years, global canola exports have averaged 16.1 million tonnes,

In the same period, Canadian exports averaged 10.32 million tonnes - or 64.1pc of the international trade.

Australia is the world's second-biggest exporter of the oilseed and accounted for 14.7pc of average exports for the five years since 2016.

The world's number three exporter by volume is Ukraine, at 13.7pc in this period.

These three nations have collectively accounted for an average 92.5pc of global canola trade since 2016.

During the past five years, these three major exporters have produced at least 25 million tonnes of canola combined, or more than 36pc of global production.

The record season was 2017-18, during which output was 27.5 million tonnes and global production exceeded 75 million tonnes for the first and only time.

The USDA is forecasting production of 74.14 million tonnes worldwide in the 2021-22 season.

But that will have to be revised downward in the coming months to reflect the Canadian crop situation.

Strong exports out of Canada in the first half of 2021 were already weighing on canola stocks before the production issues became evident.

According to Agriculture and Agri-Food Canada, closing stocks for the 2020-21 season are forecast to be as low as 0.7 million tonnes.

This implies an extremely tight stock-to-use ratio of less than 4pc.

The USDA has pegged Canadian carry out for the 2021-22 season at 1.05 million tonnes.

This is based on exports of 10.1 million tonnes - which is down from 10.5 million tonnes - and domestic consumption of 10.35 million tonnes - which is also down slightly from 10.56 million tonnes in 2020-21.

But we know the USDA production estimate could be overstated by as much as 4.2 million tonnes.

With no meaningful reprieve in sight to arrest Canada's crop yield decline, exports will have to contract to balance the equation.

The tightening supply situation there pushed the November Canadian canola futures contract on the Intercontinental Exchange (ICE) to a record close of CA$916.80/t on July 13.

This came after trading as high as CA$949/t in intra-day trade.

This was up from CA$771.40/t a week earlier; a recent low of CA$666.40/t on June 17; and CA$492.20/t a year earlier.

And there is plenty of talk about the CA$1000/t barrier being breached this week.

Price action in Europe has not been as dramatic.

But Paris MATIF futures did catch some of the rally.

Its November contract closed at a season-high of 552.25/t (Euro) on July 13, which was up from 503.50/t (Euro) a week earlier; 471/t (Euro) on June 17; and 369.50/t (Euro) on the same day in 2020.

This season could garner a rarely seen "sweet spot" for Australia's canola growers.

They are witnessing record farm-gate prices, and the production outlook is improving by the day on the back of an excellent soil moisture profile across most of the planted area - and a highly favourable spring climatic outlook.

New crop domestic grower bids smashed through $800/t in WA this month and closed last week at a mouth-watering $860/t.

It is fair to say that western growers have probably sold more tonnes at this point in the season than ever before.

But, in terms of a proportion of a growing crop, it is probably at - or slightly behind - the longer term average.

East coast growers are also excited about the potential return on investment outcomes that a high price and an above average production scenario could yield.

Newcastle, Port Kembla, and Geelong grower bids all finished the week at about $806/t, and the Port Adelaide level was slightly higher at $810/t.

Grower selling has been steady.

But that will undoubtedly accelerate as production certainty builds heading into the spring months.

A key question for domestic canola values will revolve around the European Union consumer reaction to lower Canadian production and exports.

The trading bloc is the fourth biggest importer of Canadian canola behind China, Japan and Mexico.

It will need to compete with those destinations to lock-in supply.

But it is also likely to compete heavily to buy a bigger portion of the expanding Australian export pie away from traditional Asian destinations.