INSIGHT-U.S. meat supply to shrink as feed costs surge

* Smaller corn crop will mean higher meat prices

* No herd expansion despite record hog prices

* Livestock, chicken production to decline

By Bob Burgdorfer

CHICAGO, Aug 11 (Reuters) - Illinois hog producer Mike Dumoulin has no intention of expanding his herd.

Many hog producers like him across the United States are in the same boat, as crippling feed costs restrict the growth of hog herds at a time when pork exports are surging, especially to China where tight supplies are fueling food inflation.

Their decision not to invest money to breed more hogs was reinforced on Thursday when the U.S. government reduced sharply its estimate of the corn crop to be harvested this fall. That sent corn futures prices up the daily trading limit of 30 cents per bushel.

Analysts expect corn prices to climb even further as they argue that more damage had been done to the corn crop by high heat than stated by the U.S. Department of Agriculture.

"I'm really happy with the way we are. Corn is up and hogs are up. Everything is still very uncertain," said Dumoulin, alluding to the volatility in prices.

The USDA on Thursday blamed the disappointing corn crop on a Midwest heatwave, slashing its harvest estimate 4 percent from its previous forecast.

That subsequent corn price surge sent shivers through the livestock and poultry industries, which feed billions of bushels of the grain to animals every year.

"I don't know of anybody in my area who is planning any expansion. It is too risky, too uncertain," said Dumoulin, whose family farm produces about 45,000 market hogs a year.

LESS MEAT, HIGHER PRICES

That sentiment was echoed at Elite Pork, a 8,000-sow operation in Carroll, Iowa. The smaller corn crop did not surprise Elite manager Mike Halbur, who knew this summer's 90 and 100-degree Fahrenheit temperatures had damaged it.

"We had all that heat and this corn had not pollinated correctly. It looked like a great crop, but it was not as great as we thought it was," he said.

Live hog futures LHc1 were up 0.700 cent to 106.975 cents per lb on Thursday at the Chicago Mercantile Exchange, with the active contract setting a record high for the second day in a row due to tight supplies.

The herd as of June 1 was up slightly at 65 million head, but had declined the previous two years.

Prices are being driven by rising export demand, feed costs, the weaker dollar and a recent spate of buying by China, the world's largest pork consumer.

Cattle and chicken producers have already been shrinking herds and flocks. The cattle herd is the smallest in more than 50 years.

A drought in the U.S. southwest damaged pastures on top of high corn prices have pushed cattle producers to sell animals rather than raising more of them.

That will mean less beef and higher beef prices well into 2013, analysts said. The USDA also said in a separate report on Thursday that U.S. beef production will be down 4.4 percent in 2012 from this year.

"Even if the economy slows down more, tight meat supplies will take retail meat and poultry prices to new all time highs in both 2012 and 2013," said Jim Robb, agricultural economist at Livestock Marketing Information Center.

Chicken producers just recently started reducing flocks as high feed costs have hurt bottom lines. On Monday, the largest chicken producer, Tyson Foods Inc (TSN.N) said it has cut production and expects that it may lose money on chicken in the fiscal quarter that runs through September.

"I think our chicken companies are correctly dialing back. They are reducing production," said Paul Aho, economist at Poultry Perspective.

USDA on Thursday estimates fourth quarter chicken production at 9.225 billion lbs, down nearly 3 percent from a year earlier. (Reporting by Bob Burgdorfer; Editing by Alden Bentley)