U.S. hog prices tumble as flu season approaches

CHICAGO Aug 5 (Reuters) - U.S. hog prices fell on Wednesday to their lowest levels in nearly two years as investors worried a resurgence of H1N1 flu, commonly called swine flu, will have consumers avoiding pork again this fall, even though the flu is not spread by hogs or pork.

U.S. Homeland Security Secretary Janet Napolitano told a newspaper this week that the flu will flare up after schools open in the fall and there will not be enough vaccine early in the flu season.

"That reminded people that we have a potential problem coming," said Ron Plain, University of Missouri agricultural economist. "In the hog industry, there is a fair amount of concern that it (flu) will be back in the news a lot."

Talk that producers have been slow to reduce their herds despite nearly two years of losses also prompted selling at the Chicago Mercantile Exchange hog markets.

At the CME, the August hog futures 2LHQ9 were down 1.250 cents at 52.725 cents per lb and October 2LHV9 off 1.125 cents at 49.000. Some 2010 contracts briefly dropped the 3-cent daily limit.

"The expectations are that we will have a glut of pork and that demand is not going to improve in the next couple of months because of the flu situation," said Dennis Smith, livestock broker at Archer Financial.

Cases of H1N1 flu have continued to increase around the world, but the flu has largely been out of the headlines since last winter. However, it could reemerge as a major news event if cases and deaths increase this fall.

"Hopefully the press will continue to call it H1N1 and not call it swine flu. Obviously that's something that is going to weigh on these markets," said James Burns, a hog trader at the CME.

In its latest update last week the World Health Organization reported 162,230 confirmed cases and 1,154 deaths. However, it said this likely reflected only a fraction of the true count as not every patient can be diagnosed with a lab test.

HERD REDUCTION HAS BEEN SLOW

U.S. hog producers have been losing money since October 2007, which has had analysts and economists predicting these producers would reduce production in order to drive up hog prices. But that has not happened.

"Eventually all these producers out there are going to be forced into liquidation," said Burns. "There's too many hogs out there and they have not liquidated enough."

Smithfield Foods Inc (SFD.N), the largest U.S. hog producer, and Tyson Foods Inc (TSN.N), a major hog producer, have taken the lead in liquidating some of their hog breeding herd.

However, sow slaughter is actually down from a year ago, said Plain at the University of Missouri.

Other hog producers have not followed Smithfield and Tyson, hoping the market will rebound shortly and they'll be poised to capitalize on a renewed appetite for pork.

(Additional reporting by Jerry Bieszk in Chicago, and Maggie Fox in Washington)