UPDATE 2-Cargill cuts 'pink slime' output, sees hamburger price rise
* Cargill responds to customers request for beef without filler meat
* Prices of cattle futures tumble
* Backers of meat industry decry "smear campaign"
* Governors to tour beef plant
CHICAGO, March 28 (Reuters) - Agribusiness giant Cargill Inc said on Wednesday it would cut production of meat scraps critics call "pink slime" and said consumer resistance to the filler could lead to higher hamburger prices during the grilling season beginning this spring.
Cargill's move came two days after leading producer Beef Products Inc shut down three of four facilities making the filler and said 650 jobs were at risk. Cargill did not say whether any jobs at its plants were affected.
Concern that higher hamburger prices could discourage consumer demand for beef drove down cattle futures prices at the Chicago Mercantile Exchange more than 1 percent on Wednesday.
At issue is a product the meat industry calls "finely textured beef" that is made from the scraps of meat left over from breaking a carcass into cuts such as steaks and roasts. It was widely used as filler in hamburger.
Consumer activists including celebrity chef Jamie Oliver campaigned to ban it, calling it "pink slime" and showing pictures of unsightly globs on television and the Internet.
"Some Cargill customers have eliminated FTB (finely textured beef) from their products. Some Cargill fresh beef customers have asked us to provide ground beef without (it)," Cargill spokesman Mike Martin said in an email to Reuters.
The beef industry was caught off-guard by the campaign, which prompted a flood of consumer complaints and led to supermarket chains and food companies rejecting the product. This could force meat packers to use higher quality beef for hamburger and increase prices.
Supporters of the meat industry on Wednesday fought back, calling the product safe to eat. Iowa Governor Terry Branstad appeared with U.S. Agriculture Secretary Tom Vilsack in Des Moines, Iowa and said consumer activists were conducting a "smear campaign" against meat producers.
Vilsack said the agency would stick with its recent announcement allowing school districts to choose whether they wanted hamburger with filler for school lunches.
Hundreds of school districts had asked the USDA to ban the product from school lunches and government had a duty to respond, Vilsack said.
"Let me reiterate without any equivocation something that we have said hundreds of times ... this product is safe," Vilsack said. "There's no question about it."
The nation's top three supermarket chains -- Kroger Co, Safeway Inc and Supervalu Inc -- all said they would no longer sell hamburger containing the product. Walmart, the nation's largest food seller, said it would no longer use the product in its trays of hamburger.
McDonald's was the first major fast food company to stop buying hamburgers including finely textured beef last August and some other fast food companies quickly followed.
Cargill said it was not completely halting production of the beef product, which is made at four of its five plants.
In another bid to counter the negative image of the product, Branstad will accompany fellow Republican governors Sam Brownback of Kansas and Rick Perry of Texas on a tour of a Beef Products Inc plant in South Sioux City, Nebraska, on Thursday.
Branstad, who said he had been eating the beef filler for 30 years, blamed the campaign against it on people opposed to any meat in the diet and said it could damage his farm state's economy. Iowa is dependent on raising livestock and the corn and soybeans farmers grow to feed the animals.
"There are groups out there that don't like meat consumption, who don't want people eating meat," Branstad said.
Any sharp pullback in demand for beef could put a significant dent in earnings of meat companies, which are gearing up for the spring outdoor grilling season.
Finely textured beef is made by taking the carcass scraps and heating them to separate the fat. Some producers spray it with ammonia to kill bacteria, and then add it to hamburger. The beef industry says the product is 98 percent lean meat.