U.S. hog futures posted their biggest monthly loss in a decade as record high feed costs caused by the worst drought in 56 years forced herd liquidation.

Chicago Mercantile Exchange (CME) hog futures settled higher Friday as fund buying and short-covering rallied the market from morning lows before the Labour Day holiday, said analysts and traders.

The surge in pork supply was exacerbated by hogs’ gaining more weight on cooler weather, which helps to raise the conversion of feed into body weight, analysts said.

Hog slaughter in August was expected to be the highest for that month and the highest since December 2011, according to the Denver-based Livestock Marketing Information Center.

"Cash and the cutout prices are coming down because there are too many numbers and slaughter weights are up leaving virtually nothing bullish to talk about fundamentally," said Dennis Smith, broker with Archer Financial Services.

The surge in pork supply comes even as grocers cut back on purchases of pork after bulking up for Labour Day on Sept. 3, and while meat packing companies slow purchases of hogs.

Smith said prices were underpinned by speculative buying pegged to futures’ discount to the CME’s lean hog index, which was at 81.89 cents (all figures US$).

Others cited short-covering and fund buying after CME October and December broke through 10-day moving averages of 73.83 and 71.56 cents.

October closed up 0.025 cent at 74.175 cents per pound, with December 0.6 cent higher at 72.4 cents.

Packers are expected to process 2.282 million hogs this week, up 17,000 from last week and 146,000 more than for the same period a year ago, based on U.S. Department of Agriculture data.

The average price of hogs in the most-watched Iowa/southern Minnesota market slid four straight days to $72.93 cents per hundredweight (cwt) late Thursday after starting the month at $91.49, according to USDA.

And government weekly average weight data showed hogs in the Iowa/southern Minnesota market last week at 268.6 lbs., which was up nearly a pound from the prior week. It was also 3.1 lbs. more than the week of July 28 and 5.1 lbs. higher than during the same period last year.

Live cattle firm

Aside from the CME August live cattle contract, other months settled firm along with higher cash prices that sparked short-covering, traders and analysts said.

Spot August, which expired today at noon CDT, closed 1.575 cents per lb. lower at 118.075 cents.

October closed up 0.525 cent at 126.025 cents with December up 0.2 cent at 128.65 cents.

"It was a rush for the doors once we factored in the strong cash trade," a trader said.

Cash cattle in the southern Plains sold at $123 per cwt, up $2 to $3 than a week ago, said feedlot sources. Fed cattle in Nebraska traded from $121 to $122.50, steady to $2 higher than last week, they said.

Packers did not buy enough cattle in recent weeks even though they will need fewer animals on Monday because plants will be closed for Labour Day, said traders and analysts.

CME feeder cattle ended higher Friday and for the month amid short-covering and lower corn prices, easing feed costs for cattle feedlots.

September ended 1.3 cents higher at 144.6 cents. October closed up 1.775 cents at 146.675 cents.

— Theopolis Waters writes for Reuters from Chicago.