Net farm income is forecast to be $122.2 billion in 2012, up 3.7 percent from last year.

Net cash income, at $139.3 billion, is forecast up 3.4 percent from 2011, while net value added is expected to increase by $5.9 billion in 2012 to $172.6 billion.

Reflecting the market impacts of widespread drought and high temperatures during the growing season, large increases in the value of this year's crop and crop insurance indemnity payments have more than offset declining milk sales and rising production expenditures.

These income forecasts, if realized, represent all-time record levels in all three measures of farm income.

Highlights 2012

Extreme heat and dryness in the Plains and Corn Belt is drastically cutting projected U.S. corn and soybean yields for the 2012 harvest. Both U.S. corn and soybean supplies for marketing year 2012 are expected to be at 9-year lows.

Fifty percent of the corn crop is graded in very poor-to-poor condition as of August 5, versus 16 percent at the same time in 2011.

The share of soybeans rated in poor-to-very-poor condition (39 percent) is the highest since the USDA series began. Sorghum production is also suffering.

Skyrocketing corn prices are supporting U.S. 2012 wheat prices reflecting higher feed and residual use. U.S. wheat production is expected to increase almost 13.5 percent in 2012 as wheat farmers recover from the 2011 drought.

Despite the severity of the 2012 drought, shortfalls in marketing year production do not necessarily have a detrimental impact on sector-wide farm income. Shortages raise the prices farmers receive for crops sold in calendar-year 2012, and crop insurance partially offsets the impact of lower yields.

As a result, in 2012:

• All three major measures of farm income are expected to achieve all-time nominal record highs. Inflation-adjusted net farm income is the second-highest since 1970.

• Crop receipts are leading the 2012 income increase, with strong gains in corn, soybean, hay, and wheat sales reflecting higher commodity prices. A large anticipated rise in other farm income reflects large increases in crop insurance indemnity payouts.

• A decline in dairy sales is forecast, reflecting expectations of lower farm prices for milk.

• Government payments paid directly to producers are expected to total $11.1 billion in 2012, a 6.3-percent increase from $10.4 billion paid out in 2011.

Complete USDA report here.