* August hogs highest for a lead month since May

* Pork market lifted by record pork belly prices

* Live cattle turn lower as stock market falls

By Bob Burgdorfer

CHICAGO (Reuters) - Hog futures bounded to two-month peaks and
set several contract highs at the Chicago Mercantile Exchante early
Thursday after USDA reported a sharp rise in a closely watched cash pork
price.

Pork prices have shot higher this year due to smaller supplies as hog
producers reduced herds after years of losses. The smaller herd forced pork
plants to cut production.

Cattle futures fell after moving higher early with hogs, pulled down by
an 80-point drop in the stock market.

The smaller pork supply has been known for some time, but Wednesday's
jump in the pork market surprised even the more bullish traders.

USDA reported the average pork price, or cutout, was $89.35 per cwt, up
$2.49 from Tuesday and the highest since May 18. Talk among traders on
Thursday had the cutout peaking at about $90.

Much of the cutout's gain was from pork bellies, which were up $9.75 on
average Wednesday at $133.21. USDA reported some pork belly sales Wednesday
up to $135 which it said was a record.

"We have fast food places all over the country using bacon," said one
trader.

Bacon, made from pork bellies, has become a popular garnish on
fast-food hamburgers.

This year pork belly supplies, like most pork products, are tight.
Also, bacon demand is particularly strong in the summer as consumers make
bacon-lettuce-tomato (BLT) sandwiches with fresh tomatoes.

At the Chicago Mercantile Exchange, August hog futures <2LHQ0> were up
1.075 cents near midsession at 84.450 cents per lb. October <2LHV0> was up
0.875 at 77.825 after setting a contract high earlier of 78.400 cents.

Cattle futures briefly traded higher with the strong hog market, but
gains turned to losses when the stock market fell sending the Dow Jones
industrial average down about 80 points.

"The stock market took the wind out of the cattle," said Peter Adams, a
principal at PNM Trading.

Cattle futures had been more vulnerable to a break than hogs as traders
had been predicting lower cash markets this week on ideas beef demand was
waning.

Nebraska cattle already traded $1 to $3 lower at $147 to $149 on a
dressed basis and $2 lower at $93 on a live basis.

Cash trading in Kansas and Texas has been light so far this week, with
a few Kansas sales $1.50 lower at $148 per cwt.

Near midday, CME August cattle <2LCQ0> were down 0.875 cent at 91.900
cents per lb with October <2LCV0> down 0.850 at 93.350 cents.

Feeder cattle were down, pressured by the lower live cattle and by
higher CBOT corn futures.

August feeders were down 0.875 cent at 113.650 cents per lb and
September down 0.650 at 114.200.
(Reporting by Bob Burgdorfer; Editing by John Picinich)