Falling grain prices and rising expenses will drag 2014 U.S. farm sector profits to their lowest since 2010 and have resulting effects that include less capital investment and a moderation of growth in farmland values, the Department of Agriculture said on Tuesday.

At the same time farm sector debt is expected to rise 3.1 percent, increasing more than assets for the first time since 2009, with much of the increase from non-real estate loans.

In a quarterly update, the USDA's Economic Research Service forecast net farm income in 2014 of $96.9 billion, a sharp cut from the $113.2 billion it estimated in August.

"The changed outlook is largely the result of declines in expected crop prices, reducing crop cash receipts from the August forecasts," the USDA said.

The USDA currently forecasts average 2014/15 farm prices of $3.50 per bushel for corn, the largest U.S. crop; in August its forecast was $3.90.

Falling crop receipts and rising livestock receipts will largely offset each other, making higher expenses the tie-breaker, the agency said.

Total production expenses are forecast to rise in 2014 by almost $20 billion, or 5.7 percent, a fifth consecutive annual increase. The expenses will also set new highs in nominal and inflation-adjusted terms.

The largest increase in expenses is a 28 percent jump in livestock and poultry purchases. Over time, lower feed prices should kick in, given the slide in grain prices, USDA said.

The annual value of U.S. crop production is retreating from 2013's all-time high. But for livestock, increases in value are forecast across all categories, led by cattle and milk.

U.S. exports are expected to be up for beef and veal, pork, and turkey; stable for milk, and down for broilers.

Median farm household income is forecast at $70,564, down from $71,697.

"Given the broad USDA definition of a farm, many farmers are not profitable even in the best farm income years," the USDA said.

The USDA said the elimination of direct payments under the new farm bill is being offset, in part, by higher payments for supplemental disaster assistance. Overall projected government payments will decline 4 percent.