UPDATE 1-Smithfield Foods says to reduce hog herd

(Recasts first sentence; changes dateline, headline; adds analysts' comments and details)

By Bob Burgdorfer

CHICAGO Feb 19 (Reuters) - Smithfield Foods Inc (SFD.N), the largest U.S. hog producer, said on Tuesday it would immediately begin reducing the size of its hog herd because of high feed prices.

"Given the economics for raising hogs today, we cannot continue on the current path; something has to change," C. Larry Pope, Smithfield's chief executive, said in a statement.

"Grain costs continue at record levels, with the potential of escalating, given the current U.S. government policy favoring corn for ethanol," he said.

Smithfield said it would reduce its sow herd by 4 percent to 5 percent, or 40,000 to 50,000 sows, which ultimately will result in producing 800,000 to 1 million fewer hogs annually. Currently, the company produces about 18 million market hogs a year.

Tuesday's action by Smithfield surprised some analysts and economists.

"It is a bit of a surprise. Most of their history has been expanding," said Steve Meyer, an economist with Iowa-based Paragon Economics.

Smithfield became the largest U.S. hog producer and pork processor largely through acquisitions. It raises many of the hogs it turns into pork and currently it produces about 30 percent of the nation's pork

"I would have expected it maybe sometime this summer," Rich Nelson, analyst at Allendale Inc., said of Smithfield's action. "They are being more pro-active than I thought they would be."

Hog producers have been losing money for months. The losses were huge in January, when they lost on average about $37 on each hog they sold, said Ron Plain, agricultural economist at the University of Missouri. That is the largest loss in 10 years, he said.

"It implies they (Smithfield) don't think profits are around the corner," Plain said of Tuesday's announcement.

High feed prices have largely been blamed for the industry's troubles. The price of corn, a key livestock feed, has exploded higher in the past year as more of the grain is used to make the biofuel ethanol.

Livestock producers have been angry at Washington because the ethanol industry has been aided by a tax credit that encourages ethanol's use in auto fuel and by a tariff on imported ethanol.

While the Bush administration has encouraged greater use of biofuels, such as ethanol, it also has set a goal that by 2022 about 60 percent of biofuels be made from non-food plants.

"Today the economics are very challenging and we believe that these increased costs will translate eventually into still higher food costs for the American consumer," Pope said.

Other hog producers will likely follow Smithfield's lead and trim production, said Plain. Also, more cutbacks will be needed to push hog prices high enough to cover production costs.

"This is not enough of a cutback to turn things around," Plain said of Smithfield's action.

Since hog production programs cannot be stopped immediately, the University of Missouri's Plain said it would likely be early 2009 before Smithfield's action results in fewer market hogs.

Smithfield's shares closed at $26.31 at the New York Stock Exchange on Tuesday, up 33 cents, or 1.27 percent. (Editing by Walter Bagley)