(Adds comments from industry group, analyst, adds NEW DELHI to dateline)
By Rod Nickel and Mayank Bhardwaj
WINNIPEG, Manitoba/NEW DELHI, March 30 (Reuters) - India will exempt Canada for three months from its policy that so-called pulse crops such as peas and lentils must be fumigated with methyl bromide to kill insects before leaving the country of origin, the Canadian government said on Thursday.
The move resolves for now a disagreement that threatened C$1.1 billion ($827.5 million) in annual trade.
Sources in India said the exemption applies to all countries and crops, but Canada, as the biggest pulse exporter, was affected most. The Indian government could not be immediately reached for confirmation.
Canada is the world's biggest exporter of pulse crops, a popular protein source in India, the world's largest importer. Exporters include Glencore Plc GLEN.L agriculture unit Viterra Inc VILC.UL and AGT Food and Ingredients Inc AGT.TO .
The exemption, extending one that was due to expire on Friday, will allow Canada to continue shipping to India protein-rich pulse crops without fumigating with the ozone-depleting gas. Its use is restricted in Canada.
The exemption applies to shipments that leave Canada on or before June 30.
India's fumigation policy is aimed at preventing the import of pests, but Indian agricultural analysts see this as a non-tariff barrier to curb imports and support local prices, especially when New Delhi has surplus stocks of pulses and a new wheat harvest is under way.
Canadian exporters have said that sales to India dried up in the past month due to uncertainty. uncertainty continues and will limit Canadian sales to India for delivery in July and later, said Gord Bacon, chief executive of industry group Pulse Canada.
"We have the same situation that we had" leading up to the March 31 deadline, he said.
Even so, Canadian exporters have found ways around India's policy, by sending crops due to arrive after the exemption expires to other ports for fumigation before landing in India, said Chuck Penner, analyst at LeftField Commodity Research in Winnipeg.
"In the end, there was a lot more smoke than fire in this whole event," Penner said.
Canadian industry and government officials are looking for a long-term solution, Bacon said, and are awaiting a response from New Delhi to a case it made in India this month. Canada contends that cold winters kill the pests India is concerned about and any live insects found in shipments are fumigated in Canada with other gases.
($1 = 1.3293 Canadian dollars) (Editing by Bernadette Baum and Matthew Lewis)