(FORTUNE Small Business) – The soil of the Northwest's Palouse region is among the richest in the country. Much of it is sunk in and around outcroppings of Ice Age silt dunes; farmers and ranchers here sometimes work 50-degree slopes. One of them is Read Smith, 57, who raises beef cattle and soft white wheat on his Cherry Creek Ranch. A fifth-generation farmer, Smith would like to be confident that his son Jeremy, who works the land with him, will be able to hand over the legacy to a seventh generation. But he isn't.

Modern farming has become a dire mix of frustration, hard work, low returns--and counterproductive government policies. A host of farm programs promote growing as much as possible. Some years that means a glut. Prices can drop so low that Smith loses money on every acre. So he accepts a government check to make up the difference; he took in almost $220,000 in crop subsidies from 1995 to 2003. The money helps keep him solvent, but he's furious about it. "If I get anything," he points out, "it means I'm going backward. It's an admission that the system is not working."

When Smith looks around his patch of southeastern Washington, his pessimism deepens. Young people are moving off the land; no one is coming in to replace them. And when he looks at Washington, D.C., he sees incompetence. "If any of our elected leaders think that our farm policy is working, they are not paying attention," he says.

How can this be? After all, America's farmers are among the most cosseted constituencies in the country. In the past five years alone, they have soaked up a record $99 billion in subsidy payments. Such charitable largesse might lead one to believe agricultural production is on the edge of collapse. It isn't. According to a recent briefing from the Agriculture Department's Economic Research Service, "2004 was an exceptional year for U.S agriculture," with net farm income topping its previous historical high in 2003. The problem is that the preponderance of this prosperity is enjoyed by large agribusiness, while the elimination of small farms and the decline of rural America accelerates.

President Bush's modest proposal in February's budget draft to cap subsidies per farm at $250,000 and cut payments overall by 5% acknowledges the situation, if only with a whimper. Still, the political backlash--from a bipartisan coalition of Senators who consider any change in farm programs evil--has been intense. So it seems another year will pass and no one in Congress will ask the big questions: Do subsidies work? Are they good for America? Or family farmers? The answers are No, No, and No.

The mentality that subsidies engender is decidedly nonentrepreneurial. When the key sources of wealth are government handouts and conservation payments, innovation is discouraged and even punished. "There is a tremendous amount of energy that goes into figuring out how to game the farm programs," says Bruce Babcock, director of the Center for Agriculture and Rural Development at Iowa State University. Don Reeves, a semiretired corn and soybean farmer from Central City, Neb., concedes that "there's a very large tendency to do safe, proven things." Why take risks and build new businesses when the short-term effect might be less income?

Subsidies apply to only a handful of commodity crops--chiefly wheat, corn, rice, cotton, and soybeans. Other crops such as sugar and peanuts benefit from tariffs on imports. All the other food crops that end up on the American dinner plate are grown by farmers who must respond to the market. And it is in unsubsidized agriculture that incomes and innovation are growing fastest--organic vegetables, for instance, and new brands and styles of beef (see the box at right).

It is no coincidence that the Plains States, which are heavily reliant on subsidies--seven of ten Iowa farms get them--have the most troubled rural economies. Or that California, where only one in 11 farms gets any kind of check from Uncle Sam, has the nation's most dynamic agricultural sector.

Dating back to the Depression, subsidies were supposed to help small farmers through a rough patch by propping up prices during periods of economic crisis. They no longer achieve either purpose. There is no evidence that the prices of America's few subsidized crops, which account for about 20% of agricultural sales, are more stable than those of the hundreds of unsubsidized ones.

As for helping out the family farmer, the number of farms has shrunk by half since 1960. In particular, fewer than a third of America's full-time farmers now fit the idealized image of Old McDonald and his family. Most of these small farmers get subsidies and are grateful to have them. But it is the biggest farms that get the most, turning subsidies into a particularly gross kind of corporate welfare. The largest 10% of farms get about 72% of the loot.

There is nothing intentionally sinister about this; subsidies are generally based on production, so big producers get more. But the unintentional effects are devastating. The USDA estimates that subsidies inflate the value of land used to grow crops by 15% to 25%. Many farmers, therefore, essentially send any boost in their subsidy check straight to the landlord (more than 40% of all farmland is rented). When the land comes up for sale, the artificially high values help price small guys out of the market. So the big get bigger, allowing them to benefit from economies of scale that drive their unit costs down, enhancing their advantage.

The loss of independent farms big enough to support a family means fewer people to run for the town council, to fill the schools, to philosophize at coffee shops, to keep feed and supply stores in business. More than half of America's most heavily farmed counties lost population between 1990 and 2000. If you put a map of the most subsidy-dependent counties on top of a map of those losing the most population, the overlap is uncanny.

The evidence is overwhelming that shoveling subsidies by the billions to ever fewer farmers of a handful of crops chosen three generations ago is not all that effective at helping either agriculture or rural America. Read Smith is resigned to more of the same. Congress, he says, is "going to make these long speeches about saving the family farm--then they won't do a damn thing."