UPDATE 2-China urges pig farmers to maintain production as prices fall further

* NDRC issues first warning on drop in hog prices

* Prices down 60% since January

* Farmers unlikely to respond to govt warning - analyst (Adds detail, analyst comment, graphic)

BEIJING, June 16 (Reuters) - China’s state economic planning agency urged pig farmers on Wednesday to keep pig production capacity at a reasonable level, after a closely watched indicator of production costs last week fell far below the point at which most farmers make money.

The average hog-to-grain price ratio fell to below 6:1 last week, said the National Development and Reform Commission (NDRC), adding that it had issued a level-3 warning of an excessive drop in live hog prices.

The pricing division at NDRC “will closely monitor live pig production and market price trends ... carry out reserve adjustments in a timely manner, and promote the smooth operation of the live pig market”, it said in a statement.

Live hog prices have plunged by 60% since the start of the year and are currently at an average 14.68 yuan ($2.29) per kilogramme, according to Shanghai JC Intelligence Co Ltd - their lowest level in two years.

The sharp decline has caught the market by surprise, coming even before the herd fully recovered to levels prior to the African swine fever outbreak that began in 2018.

NDRC attributed the plunge in prices to farmers sending heavy pigs to slaughter, an increase in pork imports and weak seasonal demand.

Pan Chenjun, senior analyst at Rabobank, said farmers are unlikely to respond to the government advice to hold onto pigs, with a supply shortage of live hogs in the second half now likely.

“At the moment there’s a kind of panic [as prices keep falling],” she said. “When there’s panic selling, many follow and that makes it worse.”

NDRC said last week it would adjust its early warning system that alerts the authorities when hog prices fall too low or rise too high to make it better reflect market conditions and improve its role in steadying supply.

Hog prices have fallen further this week and are close to the 5:1 hog-to-grain price ratio that triggers the highest level warning under NDRC’s new guidance.

It did not say if it will start purchasing pork from the market to shore up prices.

Live hog futures fell 5% on Tuesday to new contract lows of 19,035 yuan per tonne, though were up 0.4% on Wednesday morning.

Shares of major listed producers Jiangxi Zhengbang Technology Co Ltd, Tech-Bank Food Co Ltd and New Hope Liuhe Co Ltd are all down sharply since last week. ($1 = 6.4049 Chinese yuan renminbi)

Reporting by Dominique Patton; Editing by Jacqueline Wong and Kenneth Maxwell