Severe drought, higher production costs and unusually high interest rates took their toll on farmers last year in Maryland, Virginia, West Virginia and the Carolinas, according to a report by the Federal Reserve Bank of Richmond.

Difficult economic conditions also reduced farmers' ability to repay loans needed to purchase farm equipment and make capital investments. "All in all, it seems certain that many Fifth District farmers, and farm lenders alike, will remember 1980 as a difficult year," the report said.

The drought hit some farmers worse than others, with most of the damage occurring in the Carolinas, Virginia and Maryland. West Virginia farmers escaped most of the drought's effects.

The dry weather led to dramatic declines in yields per acre, with peanuts, soybeans, corn and cotton suffering the highest drops.

Per-acre yields and output for soybeans were off 32 percent from 1979.

Feed-grain crops, especially corn, were reduced by 25 percent.

Cotton production dropped 20 percent below 1979 levels, even with a 19 percent increase in acreage harvested.

Not all farmers were hurt. Flue-cured tobacco production rose 16 percent, and season average prices were up 4 percent over 1979.

The reduction in feed-grain output had an adverse affect on livestock and polutry production. Production costs rose significantly, and the heat killed thousands of broilers.

The Fed report said that "soaring production costs, not falling farm prices" caused the lower net farm income. Prices for production items (fuel, fertilizer, farm equipment), interest rates and wages rose 12 percent while farm product prices managed only a 2 percent gain over 1979.

High interest rates forced many farmers to postpone any purchase plans or to reduce purchases of production equipment. "Because of the extremely high interest rates and the high and rising costs of production, the demand for farm loans remained weak throughout the year, particularly so at commercial banks," the report noted.

Looking ahead, the report anticipates an improved outlook for farmers in 1981, with gross farm income rising more than production costs. Tighter supply conditions should lead to higher farm prices and better income, the report said. "Under this set of circumstances, net farm income will probably rebound from last year's level and may recover all of 1980's losses," the report said, adding that those results will depend on normalization of growing conditions.