UPDATE 2-Canada wholesale trade sags on weak farm supplies

* May trade down 0.1 pct, vs forecast for 0.5 pct gain

* Unexpected fall comes despite gains in 6 of 7 sectors

* Western farmers hit hard by spring flooding (Adds details, comments)

By Ka Yan Ng

OTTAWA, July 21 (Reuters) - The value of Canadian wholesale trade unexpectedly slipped 0.1 percent to C$44.1 billion ($42.4 billion) in May from the month before, due to a steep drop in sales of farm supplies, Statistics Canada said on Wednesday.

Market analysts had predicted a 0.5 percent rise in May. Statscan revised April's decline to 0.2 percent from an initial 0.3 percent fall.

The Canadian dollar CAD=D4 pared gains against the U.S. currency after the weaker than expected data, though the details of the report were less dire than the headline suggested.

The agricultural supplies industry fell 29.5 percent, as wet weather in Western Canada led to lower demand for fertilizer and seeds. Farm supplies fall under the "miscellaneous" wholesale category, which was the only sector out of seven to report a decline in the month.

Saskatchewan had the steepest decline among the six provinces that reported a downturn in sales, Statscan said. It was the Prairie province's biggest decline in wholesale sales since March 2005.

Earlier this month, the federal Agriculture Department lowered its forecasts for the acreage that farmers will harvest this autumn, as well as the size of their crops, after record spring rains flooded Prairie fields, drowning out young crops or preventing planting altogether. [ID:nN09266962]

Sales in the machinery, equipment and supplies group climbed 1.9 percent to C$9.1 billion, the sector's highest level since January last year, to lead the gains in the other six groups in dollar terms.

The food, beverage and tobacco sector rose 1.3 percent in May to record its seventh straight monthly increase.

"There is a necessary roll-over in demand drivers, away from a reliance upon the consumer and government, on over to growth in business and external demand, if Canada is to experience continued, sustainable growth momentum going forward into 2011," said Stewart Hall, an economist at HSBC Securities.

Hall noted that the rise in the machinery and equipment subcategory was particularly encouraging and, excluding the decline in agricultural supplies, wholesale sales activity was up 0.9 percent.

But wholesale sales were down 1.5 percent in May in volume terms, suggesting another drag to economic growth in the month, along with recent cooler housing data.

The Bank of Canada highlighted on Tuesday, after it raised interest rates for a second time in two months, that business investment has not bounced back after shrinking during the recession. [ID:nN20251478] [CA/INT]

"The decline in sales volumes will act like a piece of dead weight attached to next week's GDP report," Hall said.

Statistics Canada releases May GDP figures on July 30.

Inventories rose for the third time in four months, gaining 1.7 percent after a 0.8 percent rise in April, the most since January 2007. That brought the inventory to sales ratio to 1.19 in May from 1.17 in April.

($1=$1.04 Canadian) (Reporting by Ka Yan Ng; editing by Rob Wilson)