Farm income will drop sharply from 2011's record high as production costs rise by more than $10 billion for the second year in a row, the U.S. Agriculture Department said this week in its first income forecast for this year.

USDA estimated net cash farm income, a measure of solvency, at $96.3 billion, down 11.5 percent from 2011, when it topped $100 billion for the first time. USDA said it was the smallest decline since 2000 for the volatile income figure and that net cash farm income would be far above the 10-year average.

Production costs are forecast to rise by 3.9 percent, or $12.5 billion this year, to a record $333.8 billion. USDA said receipts for crop sales would be on par with 2011.

Drought constrained crop production last year so there will be less volume to sell this year. Costs rose by 12 percent in 2011.

Crop receipts are expected to increase slightly with wheat prices trending downward but corn prices remaining strong. Higher prices will boost livestock receipts.

"In terms of their effect on crop versus livestock farms, the major 2012 crop-related expenses (seeds, fertilizer, pesticides) are expected to rise around 1.0 percent ($560 million) while the major livestock-related expenses (feed, livestock and poultry purchases) are forecast to rise 2.4 percent ($1.9 billion)," USDA said.

Crop, conservation and other government payments to farmers were estimated at $11 billion this year, up slightly from $10.6 billion last year.

The debt-to-asset ratio for the farm sector will decline to 10.3 percent this year, from 10.5 percent last year, USDA said, and the debt-to-equity ratio also will decline. "These declines indicated that the farm sector's overall solvency position is strong," it said.

(Reporting by Charles Abbott; Editing by Dale Hudson)