WASHINGTON — This year’s historic drought is turning the spotlight on an obscure form of aid for America’s farmers: federal crop insurance.

With crop losses soaring, farmers are headed toward some $18 billion in losses, and taxpayers might foot up to $10 billion of that, according to Vincent Smith, an economist at Montana State University who has studied crop insurance for nearly two decades.

That’s on top of the $9 billion this year that the federal government provided farmers to help them afford crop insurance premiums.

Partly because of the costs involved, the insurance program has come under scrutiny from both sides of the political aisle. Budget hawks and environmentalists alike are calling for tougher limits that they say would discourage farmers from taking risks with their finances and the land.

But Congress seems to be interested in expanding, not curbing, the crop-insurance program, and farmers say the insurance program is a critical lifeline, especially this year.

In large part due to the hottest July on record in 118 years, the U.S. Department of Agriculture on Friday lowered its expected yield for corn and soybean harvests for the second time in two months–with corn predicted to be at its lowest yield in more than 15 years.

Under the insurance program, which dates back to the Great Depression and the Dust Bowl of the 1930s, the government pays 60 percent of the premium for coverage. The farmer pays the rest. Though policies are offered by private insurers, the government reinsures them against their losses and helps fund their annual operating costs.

Environmental groups complain that the government-subsidized insurance has encouraged corn farmers to take risks and till lands they otherwise wouldn’t. They say that, in turn, destroys areas critical for both wildlife and livestock struggling to find grazing places that aren’t parched.

More than 23 million acres of American grass and wetlands were plowed under for cash crops like corn and soybean from 2008 to 2011, according to a report released last Monday by the Environmental Working Group (EWG). Land losses were greatest in counties that received the largest amount of crop insurance subsidies, the study said.

“That’s equivalent to plowing the entire state of Indiana or 31 Yosemites,” said Scott Faber, the group’s vice president of government affairs. “It’s a huge impact to take an area the size of Indiana and cover it from one end to the other in fertilizer.”

Most of the newly tilled acres are in the Great Plains and the Upper Midwest, which have been hit hard by the drought. In many cases, livestock producers, with no government-subsidized insurance like crop farmers, are shelling out for expensive corn and hay to feed their animals because they can’t find new pastures for grazing.

“I don’t want to under-emphasize that crop farmers will face problems,” said Purdue agricultural economist Christopher Hurt. “But the crop sector has a lot of compensation potential right now that the livestock sector just never sees.”

Other critics say the crop insurance subsidies are simply too expensive at a time when the federal budget is awash in red ink. Nevertheless, House and Senate versions of the 2012 farm bill would offer more generous insurance coverage in place of a controversial “direct payment” program that gave lump sums of money to farmers whether they grew crops or not.

Smith, also a visiting scholar at the American Enterprise Institute, a free-market think tank, recently concluded that the expanded crop insurance program could potentially be even more expensive for taxpayers than the lump sum payments.

“If the government takes on much of the risk in farming, paradoxically, farmers adopt riskier production practices and stop using cheaper tools to manage business,” he said.

Those riskier practices, he added, include using fewer chemicals against pests, failing to rotate the kinds of crops planted, and expanding into marginal, less fertile lands which EWG members say could be conserved or used as graze land.

But defenders of the crop insurance program say its a vital part of the government safety net for farmers. “I know the program has critics, but in farm country, it’s the most valuable tool we have to survive,” said Anthony Bush, an Ohio corn farmer. “That’s why 80 percent of us buy it.”

And David Redman, an adviser in Lawrence County, Ind., who helps both farmers and ranchers respond to natural disaster, says that while big farm corporations might see profits this year because of high crop prices and insurance claims, the 100-200 acre family-sized farms won’t.

“Most of the farmers I know buy bare minimum coverage to cover out-of-pocket expenses — just enough to keep going next year,” he said, adding that a quarter of the 700 farmers he assists in his area don’t buy any insurance at all. Those farmers say they still can’t afford the premiums, even with the government subsidy, Redman said.

Bush has paid into the program for over a decade and has never qualified to collect a claim on his losses, though he expects to this year. He says his share of the annual premium is roughly $30,000. He has lost over $140,000 to drought on his corn harvest.

A member of the National Corn Growers Association, Bush says that while some highly insured crop farmers might be inclined to expand their operations, the trend can be discouraged by expanding conservation programs rather than reducing subsidies.

Debate is also swirling around USDA regulations that keep secret the identities of participating farmers — including 26 of the nation’s largest farming operations which received more than $1 million each in federal subsidies last year, according to a report by the Environmental Working Group.

Rep. Jackie Speier, D-Calif., is pushing to include a provision in the House farm bill that would repeal the USDA regulations. A similar provision failed to be included in the Senate-passed farm bill.

Even some farmers favor more transparency. Bush said he believes it would be appropriate to disclose the names of farmers who get the subsidies and how much.

Hurt, the agricultural economist, said the outdated nature of crop insurance legislation contributes to the drought’s burden on ranchers, who have no insurance at all.

In the 1930s, farmers raised livestock and grew crops side by side–and he says federal policy still reflects that business model.

“Up until the 1990s, most farmers both tended livestock and grew crops,” Hurt said. “Now we have a model dominated by specialized, industrial-scale corporations, but our policy is stuck in the ‘Old MacDonald had a farm’ model. It’s time to rethink.”