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* Pork and poultry industry slashes capacity 15 pct -ABPA
* Industry's recent expansion runs into corn shortage, demand drop
* Brazil's No. 3 processor Aurora to cut capacity 8-16 pct
* Brazil economy in worst downturn since 1930
By Reese Ewing
SAO PAULO, June 3 (Reuters) - Stubbornly record-high corn prices in Brazil, the world's No. 2 exporter of the grain, are compelling pork producers to slaughter sows they cannot afford to feed and poultry processors to close plants.
Southern states that are the traditional home to pork and poultry plants have been hardest hit by soaring corn feed prices and a plunge in demand for meat, with companies closing at least three slaughter houses to cut supply, said Francisco Turra, president of Brazil's Animal Protein Association (ABPA).
As much as 15 percent of pork and poultry processing capacity has shut in the world's top poultry exporter and fourth-largest pork exporter, he estimated. That is equal to 225,000 tonnes of monthly meat production.
Pain across the massive meat industry, which is laying off workers and losing money, will deepen the stricken government's woes as the economy suffers its worst downturn since 1930.
"The price of drumsticks in the supermarket is 5 reais ($1.40) a kilogram: that barely pays for water to produce the meat," Mario Lanznaster, president of Brazil's No. 3 pork and poultry processor Aurora Alimentos, said on Wednesday, estimating that minimum production costs were 50 percent higher.
The company will reduce output by 8 percent by furloughing one shift by August at its Abelardo Luz plant in Santa Catarina and will shut the entire unit's operations in September if conditions do not improve.
The world's top beef exporter JBS SA and the biggest poultry exporter BRF SA have raised local prices for the second time this year to try to offset rising feed costs. But this is only weakening demand in the severe recession.
Brazil produces 1.2 million tonnes of chicken meat a month, most of which is consumed at home. It slaughters 3 million pigs a month, less than half of which are exported.
Brazil's hog and chicken processors have been bleeding cash for months as an unexpected domestic shortage in corn pushed local prices to record highs. As the real collapsed against the dollar last year, merchants and exporters sold record amounts of the grain abroad, leaving local industry facing stratospheric prices for feed.
In April, the government eased restrictions on corn imports to help meet domestic demand, but prices MAZ-PIDX-BRL remain above 53 reais ($14.70) a bag, even as the global market surplus swells and international prices are under pressure.
The pain for the industry is becoming more acute as they struggle to pass on the extra costs to consumers.
Some pork producers in Mato Grosso in center-west Brazil are culling their reproductive sows, said Alexandre Possebon, the state deputy farm secretary.
At around 315 reais a carcass, they are losing 10-20 reais ($2.8 - $5.6) per animal they raise to maturity, he said.
The national pork producers' association in Brasilia said farmers were reducing insemination of pigs by 10 to 15 percent.
While cutting hog breeding rates and culling sows is typical during downturns in demand, this is turning out to be the most severe contraction for Brazil's livestock industry since the world economic crisis in 2008.
The steps are intended to tighten local meat supplies and boost retail prices, which may slow the central bank's hopes to lower interest rates later in the year. Pork production costs are at record highs. Feed, made up mostly of corn, accounts for roughly 70 percent of production costs.
Averama Alimentos, which slaughters 280,000 birds a day at its two plants, said record-high prices for the grain forced it to close its larger operation in Umuarama in southern Brazil with the loss of 1,500 jobs.
Banks had already withdrawn credit lines last year amid the political crisis and recession that deflated domestic demand.
Companies, as well as farmers, are now counting on relief when the second of two annual corn crops arrives in the coming weeks. But dry weather has hurt yields, raising concerns that feed costs could remain high until early 2017.
"It's going to take a while for prices to come down," said Fernando Iglesias, meats specialist at analysts Safras e Mercado. ($1 = 3.60 reais)
Additional reporting by Roberto Samora and Caroline Stauffer; Editing by Josephine Mason and Matthew Lewis