Ag economist for three Federal Reserve banks told Reuters the U.S. farm sector could post record-high income for 2012 in spite of the worst drought in half a century.

High market prices and insurance indemnities will help compensate grain producers for drought-shortened crops.

Ag-land prices climbed further despite the drought. In Nebraska, non-irrigated farmland values soared by 30% from a year earlier, while Iowa’s values were up 18% and Illinois by 15%.

“A lot of farmers think the future of agriculture is promising and want to expand,” said David Oppedahl, agricultural economist at the Chicago Federal Reserve Bank. “Crop farmers are flush with cash and, with interest rates low, see few alternatives to farmland for investment.”

The Kansas City Fed cited a sharp decline in third-quarter farm incomes “as escalating feed and fuel prices pushed production costs higher.” Meanwhile, the St Louis Fed said, “Farm income and capital spending were down significantly in the third quarter.”

The Chicago Fed forecast that higher feed costs will drive down cash earnings this fall and winter for dairy, cattle and hog producers. But crop farmers, in contrast, may actually make more money.

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