* Canada's crop smallest in 9 years
* Mustard buyers paying highest spot prices in years
* Bigger plantings needed to replenish supplies
* Spillover effect on wasabi for sushi lovers
By Rod Nickel and Luc Cohen
WINNIPEG, Manitoba/NEW YORK, Oct 22 (Reuters) - From Canada to India, there is a squeeze on mustard that has put producers in a pickle.
Prices of the yellow condiment dabbed on hot dogs and pretzels have leaped to their highest level in seven years this autumn as growers in Western Canada, which supplies three-quarters of the world's traded mustard seed, turn in their smallest crop in nine years.
In India, the price of a contract representing both mustard seed and rapeseed, related crops grown in the same areas, has surged by a fifth to record highs in the past three weeks over fears that unseasonably hot weather will prevent sowing that would normally begin later this month.
The higher prices threaten to drive up costs for Kraft Heinz Co, maker of Grey Poupon, and Reckitt Benckiser Group Plc, maker of French's, which hold more than 40 percent of the market share for North America's fourth-favorite condiment by sales according to some estimates.
But it is smaller producers like Barhyte Specialty Foods in Pendleton, Oregon, that are feeling the most immediate pinch. It lost customers after raising its price on organic brands to cover the cost of buying extra supplies from Canada.
"We took a big spike this year," said Chief Executive Chris Barhyte, whose company makes private label mustard as well as its own Suzie's brand. Although the bulk of his mustard seed comes from domestic farmers, he increased purchases from Canada to meet heightened demand for organic products that now make up roughly 40 percent of his overall needs. Prices for Canadian organic seed were nearly 30 percent higher than in past years, he said.
While farmers savor rising prices and food makers bemoan higher costs, those hurting most may be the middlemen who buy crops from farmers on the spot market to meet forward sales.
Some exporters are "panic buying" due to scarcity, said Bob Waldbauer, director of mustard seed sales at BroadGrain Commodities in Dafoe, Saskatchewan. "It's not a matter of price, it's a matter of supply."
He declined to name any specific firms. The biggest exporter to the United States is Viterra Inc, a Canadian grains trader owned by Swiss mining and trading firm Glencore Plc , according to data from PIERS. Company representatives did not respond to requests for comment.
To be sure, ructions in the niche mustard market barely register amid the meltdown engulfing far larger commodities.
U.S. imports of mustard seed came to just $52 million last year, almost all of that from Canada, and the entire U.S. retail market is worth about $430 million, according to Euromonitor. Consumers may barely notice, as seeds make up only 15 percent of the average retail price for a bottle of mustard, said Walter Dyck, seed division manager at Wisconsin-based mustard manufacturer Olds Products Company.
The crop is a mere blip on the Canadian Prairies, where farmers planted 75 times more wheat than mustard this year.
The problem emanates from Canada, where farmers sowed only 325,000 acres (131,523 hectares) of mustard this year, less than half the 2003 record high. It has fallen out of favor with many farmers for relatively lower returns.
In addition, dry weather cut yields, producing only 109,300 tonnes of mustard this year, down 45 percent from last year's output, according to Statistics Canada.
Processors have recently paid farmers 45 to 50 Canadian cents per pound for yellow mustard seed on the spot market, where they are likely to source about half their supplies this year, Dyck said.
"It's really, really tight."
The impact is felt most keenly in the United States, where local production covers barely a tenth of domestic demand. The rest is imported from Canada, with shipments up 15 percent this year, according to U.S. International Trade Commission data.
Big, diversified food companies have been partly protected from this year's rise, thanks to extensive advance purchases, but next year may be a different story, as high spot prices influence a new set of supply contracts.
"Clearly when the price goes up, things change. Demand and price go hand in hand," said Elliott Penner, president of French's Food Company, which commands 30 percent market share with sales of $132 million, according to Euromonitor.
"It's competitive as hell."
Kraft Heinz's Grey Poupon, which is second in the market with 11.5 percent, is also competing for more seeds, and launched a strategy this year to boost mustard sales. Kraft Heinz declined to comment.
ConAgra Foods Inc, whose Gulden's brand is third at 6 percent, said it had not experienced any disruption in production.
Beyond North America, the mustard squeeze is being felt in India, where a futures contract on the local NCDEX exchange tracks both rapeseed and mustard seed. The two crops are similar, although not usually interchangeable.
Prices have surged over 20 percent in the past month and hit a record high at 5,120 Indian rupees ($77.26) per 100 kg earlier this week due to unseasonably high temperatures.
The woes may touch budget-conscious sushi lovers who could pay a fraction more for their spicy green condiment. True wasabi is a rare and expensive plant, so producers often opt to make a substitute with a mixture of horseradish and so-called oriental mustard, which is in even shorter supply than the standard variety.
Richard Marleau, who grows mustard near Aneroid, Saskatchewan, is in no hurry to sell his crop as prices climb.
"It's nice to see prices rise finally so a guy can get rewarded for what he does," Marleau said. But processors' current bids for next year's output may not cut the mustard against lofty prices of lentils and other niche crops, making it doubtful that bigger plantings will replenish supplies.
"They're going to be in the same situation," he said. ($1 = 64.7716 Indian rupees)
Additional reporting by Rajendra Jadhav in Mumbai; Editing by Jonathan Leff and Matthew Lewis