As Johnny Bones correctly answers, no one will ever know. John Patterson, a movie critic for the Guardian stated:
The secret of the Eraserhead baby is the Holy Grail of Lynch
obsessives, and the one thing missing from Greg Olson's otherwise
admirably comprehensive biography of Lynch (David Lynch: Beautiful
Dark). And yes, it was the first thing I looked for. But one does
learn a lot about the circumstances of Eraserhead's conception and
six-year gestation. There was the birth of Lynch's daughter Jennifer,
with two severely malformed feet, which required several unpleasant
surgeries and the child's incarceration in a "massive, waist-high
cast..."
http://www.theguardian.com/film/2008/sep/06/davidlynch
The reason I mention that quote is that a Guardian profile of Lynch and his movies stated:
Most of the film, though, deals with the birth of a mutant baby, a
theme which Jennifer Lynch, who was born with club feet, now feels may
have had its origins in her father's domestic situation: "There is no
doubt in my mind that there is something there that correlates to the
baby in the film."
http://www.theguardian.com/film/2008/sep/06/davidlynch
So there's one possible explanation - the baby is representative, in some way, of his own daughter (it's also worth noting Lynch's marriage broke down 18 months into the shoot of the film).
The top Trivia item on IMDB (found here) states:
The mutant baby was apparently created from the embalmed fetus of a
calf, although David Lynch has never confirmed this or described how
he articulated it. During filming when he watched rushes, he even had
the projectionist cover his eyes when takes with the baby were
playing, so that no one would know how it was made. After completing
the film, Lynch reportedly buried the "Embalmed Calf" in an
undisclosed location. At the wrap party, they had a mock wake for it.
However, it cites no sources for this information and so it's impossible to determine how likely at all it is.
An online blog, Cinevistramascope discussed it in a feature on the top monsters in films, concluding:
The meaning of the baby and the movie remain elusive - saying
Eraserhead is about the fear of fatherhood is a start, but it doesn't
begin to explain everything. Lynch is famously reluctant to discuss
the meaning of his work; with Eraserhead, he has always refused to
explain how he created the baby as well, which has helped it retain
much of its power. The thing looks like a crude puppet, but it has a
sticky organic quality as well that has led people over the years to
speculate that it's made from a cow fetus or other once-living tissue.
I Googled "cow fetus" and don't think that's what it is (also,
blechhh), but that the idea is even worth fact-checking says all you
need to know.
Finally, if interested, a forum over at Snopes was set up to discuss this very thing. They have a varied selection of opinions, but ultimately the answer is simple:
No one really knows because David Lynch won't confirm or deny anything.