* Canola output seen at 13.36 mln T; previous view 15.4 mln * All-wheat harvest seen at 26.7 mln T; previous view 27 mln By Rod Nickel WINNIPEG, Manitoba, Oct 4 (Reuters) - Canada's canola harvest was much smaller than farmers expected and well below last year's production, Statistics Canada said on Thursday, setting up a tug of war for supplies from the world's biggest producer and shipper of the oilseed. All-wheat output appears slightly lower than previously forecast, StatsCan said. Canola production will be 13.36 million tonnes in 2012/13, down 2 million tonnes from the government agency's Aug. 22 estimate of 15.4 million tonnes and below last year's harvest of 14.5 million tonnes. The trade was anticipating a lower estimate, but the new figure was more than 1 million tonnes below the average forecast. ICE Canada November canola futures shot up 3 percent after the report, before paring those gains. "(The report) is very supportive for canola," said commodities broker Ken Ball of Union Securities in Winnipeg. "It is a shock in that it's a low number. We knew the crop was down; we didn't know if it would show up on this report." Midsummer heat during canola's vulnerable flowering period, disease and a windstorm all reduced the potential of Canada's crop. The average canola yield fell to 28.2 bushels per acre, the lowest level in five years. "A crop of that (smaller) size will require some serious demand rationing to occur," said Dave Reimann, market analyst with Cargill Ltd's grain marketing services division. Canadian canola crushers, such as Cargill, Richardson International Ltd, Bunge Ltd and Archer Daniels Midland Co, collectively have processed record volume for seven straight years, but extending that string may prove challenging, even with new capacity being added. Canola seed importers - such as China, Japan and Mexico - are faced with either finding oilseed substitutes or paying up for small, pricey Canadian canola supplies. Still, canola's upside is limited by its "drastically expensive" price compared with other oilseeds used to produce vegetable oil, such as palm oil, Ball said. Canada, which is also the biggest shipper of spring wheat, durum and oats, is wrapping up the harvest of most of its crops. All-wheat production is estimated at 26.7 million tonnes, just below the previous estimate of 27 million tonnes but still well above last year's harvest of 25.3 million tonnes. The wheat crop looks to be the biggest in three years and the third-largest since 1999 - a bright spot for a global wheat trade concerned about severe drought hitting the Black Sea region. The estimates look neutral for wheat and durum prices, Reimann said. Average all-wheat yield of 42.1 bushels per acre was slightly below expectations. Traders surveyed by Reuters expected, on average, canola production of 14.6 million tonnes and an all-wheat harvest of 27 million tonnes. StatsCan surveyed 11,657 farmers Sept. 4-11. The oat harvest slipped modestly to 2.9 million tonnes. Durum wheat production looks bigger than last year, but just below expectations at 4.4 million tonnes, while barley output is also larger than last year at 8.6 million tonnes, but below the trade view. Canada is a minor producer of corn and soybeans, and some of those crops have been expected to backfill U.S. supplies, which were curtailed by severe Midwest drought. The eastern province of Ontario has also suffered dry conditions, however, and StatsCan trimmed Canada's corn estimate by 1 percent to 11.6 million tonnes, and soybean production by almost 3 percent to 4.3 million tonnes.