CHICAGO (Dow Jones)--Hog futures fell sharply Tuesday as cash prices for slaughter-ready animals continued to slide and markets sold off broadly.

October hog contracts were down 2.55 cents, or 3%, to 83.25 cents a pound in trading at the Chicago Mercantile Exchange. December hogs fell 2.3 cents, or 2.8%, to 80.80 cents a pound.

Hog futures were pressured as markets fell broadly, tied in large part to growing worries over U.S. and European banks, and cash prices for hogs showed no sign of stabilizing. The Dow Jones Industrial Average was recently down 270 points to 10970. Most commodities were also down sharply; crude was down 2.2% to $84.55 a barrel.

October hog futures are down nearly 6 cents since mid-August as cash prices for pork and animals have spiralled downward from record highs in July and August. The drop was in many ways expected, since hog producers are in the middle of a sharp seasonal increase in production and slaughter rates are expected to rise about 17% between August and November.

The USDA's pork carcass composite value Friday fell 75 cents to $94.60 a hundred pounds, the lowest since June 16. Some brokers expected prices to stabilize this week as packers settle into autumn slaughter schedules.

The sharpness of the recent fall in cash prices, however, has taken some traders by surprise. The pace is due in part to a crowd of producers who raced to get out in front of falling prices by selling some hogs ahead of schedule, which in turn led to quick-ballooning supplies.

At the same time, many hog producers have very little flexibility to hold back slaughter-ready animals and wait for better prices. That's because big-time hog production facilities, especially, have tight production schedules that require moving batches of animals steadily through the system.

Farms with reproduction operations "have no place to store these pigs [while] waiting for a better price. When it's time for them to go, they have to go and owners have absolutely no leverage," said Steve Meyer and Len Steiner, authors of the CME Group's Daily Livestock Report.

The fast-dropping cash prices have helped traders narrow the gap between futures and cash prices, which had been extra-wide for weeks, in some cases by as much as 16 cents. The gap is crucial to traders since cash prices converge with a future contract as it nears expiration--for October, less than six weeks away. The current gap is about 9 cents, while October futures trade more than 3 cents above their highest-ever expiration price.

The latest CME two-day lean hog index, at which contracts settle, for Thursday was down 1.87 cents to 92.60 cents a pound, as calculated from USDA market data.

CASH MARKETS

Cash hog prices Tuesday are predicted to be lower in most areas of the Midwest and initial bids reported from 50 cents to $1.50 a hundred pounds lower. Most of the pork processing plants have sufficient hog supplies booked deep into the week and some need only a few more loads to complete their Friday and/or Saturday slaughter schedules.

The Labor Day holiday on Monday gave processors an extra day's worth of hogs to spread across the balance of the week, so prices may be under pressure throughout the week unless demand picks up for arrivals late this week and into next week.

The latest Dow Jones Newswires pork packer margin index was plus $20.06 per head, compared with plus $18.50 the previous day.

The terminal markets are expected to trade steady to lower with tops seen from $55 to $60 a hundred pounds.