How far should government go to protect farmers from bad times — and, sometimes, themselves?

In dairy’s case, Speaker John Boehner (R-Ohio) is adamant that he won’t accept the hands-on approach espoused in the Senate bill to manage future milk supplies to protect farmers’ margins. Corporate giants like Kraft Foods and Nestle back the speaker. And this puts House Agriculture Committee Chairman Frank Lucas (R-Okla.) in the hellish position of having to go against the man who’s been his best friend and ally in the whole tortured farm bill debate: Rep. Collin Peterson (D-Minn.).

( Also on POLITICO: Small ball too much for Congress)

In the case of payment limits, it’s a very different set of players. But the question is again one of balancing government’s role and the risks of modern agriculture.

Those who advocate for tighter limits are often doing so in opposition to large farms, period. Others make their pitch on equity grounds since most farm subsidies now go to households — earning well above the median income for the nation.

There’s a regional slant, for sure: Midwest moralists eager to impose their vision on the sometimes feudal land structure of Southern agriculture. But the debate affects a much wider swath of family farms, which still constitute 87 percent of the value of crop production in the U.S. And given the rise of corn and soybeans, North and South Dakota now rival Arkansas and Mississippi in the size of their own farm operations.

Talks have continued through this week’s recess. And the House and Senate Agriculture staffs continue to speak hopefully of filing a bill prior to President Barack Obama’s State of the Union address next Tuesday evening.

( Also on POLITICO: Lawmakers cutting deals on farm bill)

Meeting that schedule is a major challenge. Meatpackers and ranchers have their own scores to settle first over labeling rules for livestock. But real progress appears to have been made in crafting a revised dairy program that can break the deadlock between Boehner and Peterson, Lucas’s ranking Democrat.

Measured in dollars, dairy has never been a big part of the farm bill’s commodity title. But it has an outsize political impact and is best described as a battle of the well-connected vs. the well-heeled.

Politically influential milk co-ops like Dairy Farmers of America dominate one side. Kraft and Nestle, the Swiss international, line up with powerful processors on the other. There’s no love lost after years of combat. And to help Lucas, Agriculture Secretary Tom Vilsack has stepped in and brought his chief economist, Joseph Glauber.

The goal is to create a new insurance program under which dairy farmers can buy coverage to protect their operating margins — the difference between milk prices and what a farmer pays in feed costs.

To guard against overproduction — without resorting to supply controls — the new draft proposal takes a two-step approach. It promises to fully meet the margin payment owed to a farmer on the coverage for his base milk production. But it pays out on only 25 percent of the margin coverage for any milk above the farm’s assigned base.

In essence, the government would be drawing a line, saying it would help protect a dairy farmer’s core operations but that anything above that would require the farmer to shoulder most of the risk.

Questions remain as to how to define that base for each farmer, and what allowance will be made for small herds and the fact that milk production per cow has been growing at an annual rate of 1.5 percent.

“The discussions about the mechanics of a Plan B program are still fluid, pun intended,” joked a spokesman for the National Milk Producers Federation. But Peterson is willing to listen, and the new option is a more individualistic approach than the Dairy Stabilization Act language he has supported in the Senate bill.

Indeed, DSA was the early vehicle for a margin insurance program. But it also imposed supply controls that would order cuts from milk marketings for all farmers enrolled if the national margin fell below $6 per hundredweight for two consecutive months.

If margins continued to decline, the government-backed cuts would grow as deep as 8 percent in hopes of stabilizing the market situation.

This was a blunter, more collective approach than what’s now being considered. Given the history of turmoil in the dairy industry, Peterson decided that this stronger government role was warranted. The uncertainty now is whether the new, more subtle approach will work.

“Is this enough? We don’t know,” Petersonsaid candidly of the new approach. But he added: “The fact that it is being done in the right direction makes it more easy for me to go along with it.”

If anything, the debate over payment limits may be more contentious: How far up the ladder should the government go as farms get ever bigger?

A report last August by the Economic Research Service in the Agriculture Department was revealing here and introduced a new “midpoint acreage” index to better measure the steady escalation of larger farms.

As defined in the report, half of all the cropland acres are on farms bigger than the midpoint, and half are on farms smaller than the midpoint. The new midpoint index is a more telling measurement than simply averaging the size of all farms nationally. And the report found that the midpoint acreage for U.S. cropland had jumped from 589 acres in 1982 to 1,105 in 2007 — the most recent year of full data.

Mississippi, home to Sen. Thad Cochran, the ranking Republican on Senate Agriculture, stands out, going from 950 acres to 1,950 acres. But the Midwest saw the greatest change. The weighted median values for harvested acres in North Dakota went from 882 acres to 2,240 in the same 25-year period. Illinois, Iowa, Minnesota and South Dakota all saw a better-than-100-percent jump.

Government commodity payments appear to have had less to do with this consolidation than other factors — the search for higher profits, greater efficiencies of scale and an abundance of flat land making it easier to merge farms.

But the cumulative change is especially important now, given the redesigned safety net of the new farm bill.

The nearly two-decade-old system of direct cash payments — costing $4.5 billion a year and distributed at a fixed rate tied to the land — will be replaced by two options linked to real market losses.

The first program, known as Agriculture Risk Coverage, promises early — but temporary — assistance to growers faced with a downward cycle of prices.

Under the latest farm bill drafts, ARC payments are expected to be triggered once prices fall at least 14 percentage points below the prior five-year average. This will almost certainly be a boon for the Midwest in 2014, given the drop already in corn markets. But the subsidies are more of a cushion to help growers adjust — and will fade after several years if prices don’t improve.

The second program, Price Loss Coverage, fits the more classic countercyclical model of fixed, government-set target prices — not a rolling five-year average. PLC payments will typically trigger later in a market downturn but then promise the farmer a more permanent floor to cover production costs.

But for both programs, the subsidies are designed to be greater in periods of stress. After the good times of recent years, the spirit of the bill is to be prepared for “when the world falls apart.” And this is a real departure from the current system of direct cash payments, which go out even when a farmer is making a profit.

Proponents of the new approach argue that the payment caps are self-defeating in this context: Capping aid is the equivalent of throwing a shorter rope to a farmer in peril.

Nonetheless, the political appeal of these caps is very real. And the backroom talks now focus on trying to find some compromise on two reforms: a $50,000 individual cap on future ARC or PLC payments and new rules as to who qualifies as being “actively engaged” in a farm’s operations.

Both ideas were part of an amendment narrowly adopted in the House last June on a 230-194 vote. Both run squarely into the structure of modern agriculture.

The $50,000 cap — really $100,000 for a farmer and spouse — is less than half of what the 2008 farm bill allowed. If strictly enforced, it could mean that a 3000-acre corn farm will get substantially less from ARC than is now forecast. Large Southern rice operations, with much higher production costs than corn, fear the $50,000 cap even more.

Lucas is said to have argued for a $105,000-per-individual cap, less than the $125,000 limit in his initial House bill but in line with current law. A compromise at $75,000 per individual has been discussed and could be paired with tighter caps barring the very wealthiest farmers from qualifying for payments.

The second reform, which redefines who is “actively engaged” in farming and therefore qualifying under the cap, is even more difficult.

Proponents like Sen. Chuck Grassley (R-Iowa) and Rep. Jeff Fortenberry (R-Neb.) argue that the change is needed to close a loophole that has been abused in the past to escape the payment limits. For example, a September report by the Government Accountability Office singled out one Louisiana farm operation, which received almost $652,000 in government payments in 2012 after 16 individuals — plus four spouses — claimed to have some role as “managers.”

In the past, Grassley has focused on tightening the standards to require these farm “managers” to show they work at least half time on that task. In this round, he and Fortenberry cut to the quick by simply saying only one “manager” can be designated per farm.

This simplicity helps, in that the GAO found that the government was having trouble already enforcing the existing standards. But it’s also a blunt instrument — compounded by the fact there was an important flaw in the initial drafting of the amendments.

Southern lawmakers are most incensed by the Grassley-Fortenberry language. Landowners who want to manage farm operations on their own property will face new impediments, critics say. More broadly, the proposed changes are said to ignore the increased role of managers who don’t drive the tractor or move irrigation pipe but are just as vital to modern agriculture.

One potential compromise is to kick the issue back up to Vilsack and ask him to take a more aggressive role in cracking down on the genuine “bad actors” abusing the current rules. But payment limit advocates would say this had been tried before, in the 2008 farm bill, without success. Obama himself comes under criticism for not living up to his own 2008 campaign promises to tighten enforcement.

“The fundamental issue is whether or not the payment limits, enshrined by Congress in farm bills for four decades, are real or fake,” the National Sustainable Agriculture Coalition said in a statement Thursday. “Under current law they are fake. They can fairly easily be sidestepped by adding more and more farm managers to a general partnership that controls the farm.”

“If a farm is so large that it needs 5 managers, or 10 managers, or 20 managers to function, and even if all those managers are doing some small but critical function on behalf of the farm, it does not therefore follow that the statutory payment limitation for that farm should magically be multiplied by 5 or 10 or 20,” the NSCAC said.

“Again, the fundamental issue is whether the payment limit is real or imaginary. It has nothing to do with whether a farm grows so large as to need an entire management team to function.”