* Net farm income down 3 pct from 2011's record
* Production costs up 8 pct, feed rises 18 pct
* Big increase expected in insurance payments
* Farm equity to set new record as assets rise
WASHINGTON, Nov 27 (Reuters) - U.S. farm income will drop by 3 percent this year, the result of surging production costs aggravated by crop losses that stemmed from the worst drought in half a century, the government said on Tuesday.
Even so, income would be close to the record high set in 2011, the Agriculture Department said. In a quarterly forecast, it said production costs would rise by 8 percent this year, outpacing a gain in crop and livestock income.
Feed costs are up 18 percent this year, the USDA said.
"Despite gains in almost all sources of farm income, larger increases in farm expenditures, especially for purchased feed, have more than wiped out those price-led gains to farm income," it said.
The largest increases in farm income would come from federal and private insurance indemnity payments, the USDA said.
So far, crop insurers have paid $6.3 billion on losses this year. Some analysts say the still-persisting drought in the Farm Belt will drive indemnities to $20 billion, nearly double the record set last year.
The 8 percent rise in production costs would follow a 9 percent surge in 2011. The USDA said the string of large year-to-year increases in production costs dated to 2002.
Land values continued to rise in 2012, which will bring a new record high for farm equity.
The USDA forecast net farm income of $114 billion this year. It pegged net cash farm income at $132.8 billion, down 1.4 percent.