HAMPSHIRE, Illinois (Reuters) - As U.S. growers anticipate record returns for crops they are planting this spring, at least one sector of the rural economy is not enjoying the runup in grain prices: hog farmers.

Pat Dumoulin holds a piglet as his parents, Pat (L), and Bill Dumoulin look on at their family farm in northern Illinois, Hampshire, April 2, 2008. REUTERS/Bob Burgdorfer

High prices for grains, driven by demand for food around the world, means high prices for hog feed. The price of energy, a major cost for farmers, has also jumped, and hog prices have dropped well below production costs for farmers all over the United States.

Economists predict that some will pare back this year and others will quit. Smithfield Foods Inc, the country’s largest hog producer, has already said it is cutting production because of high feed costs.

But for Bill and Pat Dumoulin of Hampshire, Illinois, quitting is not an option, nor do they intend to cut back. They rely on their business to support the families of their three adult children and to save for college for their 20 grandchildren.

Their hog barns northwest of Chicago are full and they are prepared to weather bad times, just like they did in 1998, when hog prices plummeted to a 50-year low.

“We are in a down cycle but we will come out of it,” said Pat Dumoulin, 74, the matriarch and bookkeeper of the operation.

Instead of cutting the number of hogs, the Dumoulins are looking to cut costs. They already slashed electricity use by two-thirds in one barn just by installing more efficient lights. They also will be adjusting hog feeding units to reduce feed spillage.

“The first thing you try to do when you come into a down market is look at where are you going to cut costs,” said her son, Patrick, 47, who with his brother Michael, 48, oversees much of the operation.

ECONOMIC COST

The Dumoulins were not prepared to put a figure on their production costs, but according to agricultural economist Ron Plain of the University of Missouri, at current corn, electricity and diesel prices, it costs about $54 to produce 100 pounds of pork.

With live hogs selling at $40 per 100 pounds (45 kilograms) in Midwest markets, producers are losing about $35 on each 250 pound market hog.

If these trends continue, those figures would be mean a loss of more than $1 million a year for a midsized operation producing 30,000 hogs. Plain predicts producers will lose money throughout 2008 and much of 2009.

Steve Meyer, an economist at Paragon Economics in Des Moines, Iowa, said the losses could be worse than those experienced in 1998, largely because feed and fuel costs are much higher now. “There will be some people going out of business,” Meyer said.

Part of the problem is a production glut that resulted from an expansion in the past five years, when hog prices were profitable.

“Things are not going to get a whole lot better until we raise fewer hogs,” said Plain.

The Dumoulins, like other producers, expanded during those good times, adding 800 sows for a total of 2,000. They can now produce and market about 40,000 slaughter hogs a year.

“It was prompted by a large family and because college is coming,” Bill Dumoulin, 79, said, explaining how the needs of his grandchildren drove his expansion. “We needed to find sources of income to put them through school.”

These extra hogs as well as those from other producers are hitting the market now.

On March 28, the U.S. Agriculture Department reported nearly 65.91 million hogs were on U.S. farms as of March 1, up 7 percent from a year earlier and the most ever for that date.

Those numbers are boosted by hogs from Canada, where feed prices are even higher than in the United States and where producers are liquidating herds. In a report on April 2, the department said 2.88 million hogs came into the country from Canada in the first three months of this year, or more than 4 percent of the U.S. total.

While this oversupply has resulted in an abundance of pork, prices in U.S. supermarkets have not changed much. Pork prices averaged $2.82-1/2 a pound ($6.23 per kilogram) in February, the latest monthly average available, compared with $2.797 a year ago, according to U.S. Agriculture Department data.

BET ON FUTURE

The Dumoulins have faith in predictions that cheap hogs will not last beyond next year, as high-priced feed and fuel force farmers to cut production, reducing supply and pushing up meat prices.

If they cut back now, it would take them too long to build up when prices return, they reason.

“Pork is the most eaten meat in the world and that is not going to go away,” said Pat Dumoulin.

The United States is exporting more pork than ever, sending it to places China, Japan, Mexico, Russia, and South Korea, bolstered by a weak dollar.

The Agriculture Department on Wednesday estimated a record 3.735 billion pounds of U.S. pork will be exported in 2008, up 19 percent from 3.138 billion pounds for 2008.

“Our exports are great. If not, the hog market would probably be in that $8 to $9 area,” Pat Dumoulin said, referring to the price per 100 pounds for live hogs.

One of the main problems facing hog farmers is the high price of corn, which have surpassed $6 per bushel on the Chicago futures market. That is the highest price ever for corn and up from $3.70 a year earlier.

The Dumoulins, whose family has farmed this land for 100 years, produce much of the corn that they feed their pigs, but they still have to buy about 300,000 bushels a year.

Their last purchase was at $5.31 per bushel. Last fall they bought some at $4.78. “We should have bought more,” lamented Patrick.

While many people blame high corn prices on U.S. subsidies that encourage the production and use of the biofuel ethanol, which in the United States is made largely from corn, Pat Dumoulin sees it as more complicated than that.

For one, she notes that corn exports have increased. The United States has sold nearly 53.53 million metric tons of last fall’s harvest to foreign buyers, up 26 percent from the year-earlier period.

She also notes that the cheap dollar has accelerated overseas demand for corn, just as it has for pork. And, a growing middle class worldwide is buying more food and using more fuel to drive cars.

“There is the cheap dollar. We have a growing middle class all over the world.”