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Farm income prospects have faded by about $2 billion from what the Agriculture Department was forecasting earlier this year.

"While cash receipts are expected to remain near rec-ord levels, lower direct government payments and slightly higher farm expenses will pull down net incomes," the department's Economic Research Service said.Agency economists said important factors in the weakening of farm income prospects are the large supplies of some commodities and weak demand for wheat and milk.

Direct payments to farmers could drop 5 percent to 10 percent from last year's $9 billion, said economist Diane Bertelsen. But much will depend on farmer participation in 1991 crop programs, she added.

Net cash income was forecast in a range of $53 billion to $58 billion, down from $55 billion to $60 billion indicated earlier. Last year's net cash income also was reduced to $58 billion from $59 billion estimated previously but was still a near record.

As used by the research service, net cash income "measures the value of commodities sold in a calendar year plus government payments, less out-of-pocket costs." Some commodities sold actually may have been produced in earlier years and stored until marketed.

In another method of accounting, the report said "net farm income" may now be in the range of $42 billion to $47 billion, compared with $44 billion to $49 billion indicated previously. It was a record $49 billion in 1990.

Net farm income is used to measure the value of agricultural production in a calendar year, whether sold or stored, plus government payments, minus all costs, including depreciation and other allowances.

Retail food prices are still expected to rise an average of 2 percent to 5 percent this year, compared with a 1990 increase of 5.8 percent.