As the mum of sporty kids, in line with what others are saying, honestly the coach is doing you a favour. Team sport is about winning. Somewhere down the line we sent mixed messages about this and it really isn't helping young people. Everyone should be able to play, but in a team which is at the appropriate level for them.
I've seen weaker kids left in teams that they just aren't good enough for, even though that's a tough thing to swallow as an adult. The end result, always, is that the other kids on the team become frustrated and their annoyance is directed at the weaker child who become more and more isolated from the team. Thats actually the fault of the adults around them for not ensuring they are playing at the right level.
I used the analogy of maths;y my child only had set 3 ability, but would love to be in set one with his friends . Tries incredibly hard, works his socks off. I shouldn't insist he's in set 1 because he is trying his best. It's not appropriate, it holds others back, and crucially, creates a stressful and unproductive atmosphere for the child.
I have seen with my own daughter, you are far more likely to keep them in sports if they are playing at the right level. I know you are saying there aren't too many other clubs (and I sympathise with that as it's the same where we are) but given the fact there is opposition for matches, there must be some alternatives within driving distance?
Al l this said, it's not easy as a parent to know your kid is the one being referred to in situations like this. Your daughter will be looking to you and watching your reactions. Try and not take it personally, as hard as that is!