* Hog producers hit hard by high feed costs

* Worst drought in 56 years behind rally in grains

* Canada hog producers hit hard too

* USDA issues quarterly hogs/pigs report on Friday

By P.J. Huffstutter and Theopolis Waters

CHICAGO, Sept 27 (Reuters) - With the worst U.S. drought in half a century driving feed prices sky high, pork producers are facing an untenable choice: drain their savings and gamble on a better future, or sell off their herd and get out of the business altogether.

A disappointing corn harvest has forced the slaughter of sows - adult female hogs that are the building blocks of a herd - at record rates, swelling pork supplies and sending prices plunging.

As a result, consumers could be treated to cheap pork this fall but would have to dig deeper into their wallets next year as prices rise for products from bacon to pork chops to hams.

A clearer picture of how severely the drought impacted hog producers is expected to emerge on Friday, when the U.S. Department of Agriculture releases its quarterly report on the number of hogs and pigs on farms as of Sept. 1.


So far, the signs are grim. A whopping 9.9 million head of hogs were rushed to market in August, the most ever for that month, according to data analyzed by Reuters.

Many small producers grow much of their own grain and are worried that any disruptions in federal crop insurance payouts - sorely needed if they suffered crop losses due to the drought - could squeeze their ability to survive through the current downturn.

Larger producers are scouring the Midwest to snap up whatever feed they can find, or are sinking tens of millions of dollars into importing corn from Brazil. Many fear that, by this winter, there will not be enough feed on hand to meet the demands of the entire livestock industry.

John Prestage, whose family owns and operates the North Carolina-based Prestage Farms which ranks among the top five U.S. hog producers, opted for a simpler cost-saving solution: Send skinnier pigs to the processor.

The industry is "in a very modest contraction. It's very seriously not in growth mode," Prestage said.


HUNT FOR FEED

Big or small, many producers are aggressively hunting for feed.

In June, Illinois farmer Phil Borgic began buying corn from growers in his area and selling off some of his animals. It netted him a profit, he said, in part because the local cash corn market's basis value - price as measured against futures at the Chicago Board of Trade - was normal at about 15 cents per bushel below December corn futures.

But as the local corn fields withered the basis value jumped to 40-60 cents higher than normal, Borgic said. Now, he is looking to top corn state Iowa for supplies to feed his 80,000 pigs.

"We have to make sure we have it in the bin - corn in the bin," said Borgic, who has a year's supply of corn in storage and is still looking for more.


FEED COSTS HURT SMITHFIELD

The drought's ripple effects are being felt far and wide. Earlier this month, Smithfield Foods Inc, the largest U.S. pork and hog producer, reported a quarterly profit that fell short of analysts' estimates due to high feed costs.

The company's fresh pork operating margin was down 1 percent for the first quarter that ended July 29, after being up 3 percent the year before.

Tyson Foods Inc said it expects lower-than-projected fiscal earnings for 2012 in its beef and pork sectors as the industry copes with "very difficult market conditions."

However, "we still anticipate solid earnings for the year, and we are performing well during challenging circumstances," said Donnie Smith, Tyson president and chief executive officer, when the company reported earnings on Aug. 6.

The hog industry has gone from being in a state of expansion to current conditions in a matter of three months - the time it took for grain prices to hit record highs due to the drought.

The significant liquidation of animals will likely delay the industry's ability to quickly bounce back.

It takes about nine to 10 months to produce a hog for slaughter, from conception to full maturity, said Bob Brown, an independent market analyst in Edmond, Oklahoma.

The recent trend of farmers racing to the slaughterhouse, in part to avoid the typical seasonal downturn in prices in the winter, continued this month. Weekly hog slaughter in early September hit the highest rate in 4-1/2 years, according to data from the U.S. Department of Agriculture.

USDA estimated total U.S. pork production for the week ending Sept. 22 at 485.6 million lbs, up 4.5 pct from a year earlier and up 2.4 pct year to date.

The earliest signs of liquidation will be seen in the Kept for Breeding inventory of this Friday's government report, with larger numbers of sows and boars being slaughtered during the June-August quarter and fewer replacement gilts being retained.


CANADA HIT HARD TOO

The economic pain caused by the drought is particularly acute in Canada, the world's largest live hog exporter. Earlier this month, two of Canada's largest hog-producing operations, Big Sky Farms and Puratone, entered receivership and creditor protection, respectively.

Canada's shipments are projected by the USDA at an estimated 5.8 million head in 2012, about the same as last year but down from over 10 million head exported in 2007.

Doug Martin, the third generation of a 75-year-old family farm near Selkirk, Manitoba, is reluctantly closing his barns and selling off every one of his 1,200 sows and weanlings.

The liquidation is costing him about $44 for every 40-lb pig he sells at current feed and hog prices, but it allows him to avoid worse losses in the coming months.

The family grain business, which is cashing in on the same high crop prices which is killing his hog operation, will support the family until next summer, when Martin said he will consider getting back into the hog business.

"I'll lose money doing this, but I'll lose less money by getting out," said Martin, 55.


PORK PRICES SET TO BITE

American consumers are expected to enjoy temporarily tasty deals on chops, tenderloins and other pork products this fall at the grocery store, say retail and agricultural analysts.

But they caution that the nation's shrinking herd will mean a shortage of pork products next year is all but unavoidable.

It is not just bacon that could be scarce. By 2013, they warn, supplies of beef and chicken will also be tight, as the entire U.S. livestock sector wrestles with slimming down its herds amid the economic strain of record-high feed costs.

"The whole protein curve will be going up," said Bob Summers, a retail analyst at Susquehanna Financial Group.

That, in turn, has placed further strain on grocery retailers who are loath to adjust meat prices too much - even though they are faced with their own financial pressures, Summers said.

"Any time you start to get price increases that are above 3 percent, you start to see demand destruction," Summers said.

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