Net farm income will reach $122.2 billion in 2012, the highest-ever nominal profit and the second highest in inflation-adjusted terms after 1973, the U.S. Department of Agriculture(USDA) said in its first forecast since drought spread across the corn belt.

The expected 4 percent increase in average farm profit from 2011 comes as agricultural states, including Iowa and Ohio, have emerged as battlegrounds in the November presidential electionand lawmakers have failed to renew legislation outlining agricultural subsidiesahead of its expiry on September 30.

Intense summer heat and dry soils dramatically worsened the outlook for this year’s U.S. corn and soybean harvest, propelling prices to all-time highs. Farms in northern plains states that escaped the worst conditions, such as North Dakota, will earn 39 percent more this year, the department said.

“Essentially, you have a situation where the increase in prices offsets the reduction in the quantity produced and sold during the year,” said Mitch Morehart, a USDA economist.

Many farmers in the drought-hit areas abandoned crops and will file insurance claims to cover losses. “Insurance indemnities are forecast to offset the impacts of declining yields associated with the drought,” the forecast said.

Agricultural economists at the University of Illinois have estimated that the drought will trigger gross indemnities of about $30 billion this year, with an underwriting loss of $18 billion.

Of that, the U.S. government would shoulder about $14 billion, they said.

The department said that the government would also pay producers $11.1 billion in direct subsidies in 2012, a 6.3 percent increase from last year.

Rising farm incomes could buoy sales at equipment makers such as John Deere.

Livestock farmers are generally unable to buy crop insurance, and high feed prices will cut into profits for dairy and pig operations, the department said. Chris Hurt, a Purdue University economist, this week warned of a “tsunami of red ink” in the pork industry.

Tom Vilsack, U.S. agriculture secretary, said: “While strong farm income is a positive factor in carrying farmers and ranchers through a challenging time, we must ensure that all producers have the tools they need to be successful in the long term.”