The strength of the Brazilian real against the U.S. dollar is proving to be an expensive proposition for Brazilian agriculture. In the 2005-06 season alone, losses could mount to as much as $2.95 billion, or R$5.9 billion (reals) to producers alone. Including all other business that sell and industrialize agricultural products, losses could soar to $14 billion (R$28 billion).

These are the conclusions of Brazilian market analyst José Pitoli, who has been working with rural cooperatives in Brazil for more than 25 years.

The analysis compared production costs including fuel, inputs and transport with the declines in farmers' income due to the weakened dollar versus the real, Brazil's national currency.

The major problem is that the majority of Brazilian grower costs are due in reals, and farmers sell their crops in dollars. Since commodity prices haven't gone up, the gap between the soaring real and a declining income in dollars due to exchange rate changes has lead to heavy losses.

The last two years of drought in southern Brazil have added to the grim picture. Not only do farmers in the country receive less for their products, but in the past couple of seasons, they've seen their yields hit the floor.

With the U.S. dollar worth R$2.11, the analysis shows that soybean growers' average gross income should reach $217.97 per acre. When compared to input costs of $183.43 per acre, returns are only 18.8 percent compared to nearly 35 percent in better times.

With the already high debts inherited from the last three years and the lack of government funding for agriculture, farmers could be facing a turning point in their business. After this season, depending on what else goes wrong, many will be facing bankruptcy.

The situation could get even worse if the dollar falls further. With an exchange rate of R$2 per $1, returns drop to only 12 percent, an “extremely delicate” situation, say Brazilian analysts.

Two states in Brazil are facing critical situations if they don't harvest high yields. The states of Tocantins and Piauí could face a loss of $45.28 per acre and $27.04 per acre, respectively. For this not to happen, yields have to average at least 32 bushels of soybeans per acre. Anything less would mean heavy losses to farmers in both states.

And even with average yields, the higher risk and money needed to plant in Tocantins and Piauí will make it tough to attain a reasonable income. An average yield would produce returns of $6.33 per acre in Tocantins and $17.07 in Piauí.

Although the two states aren't major producers in Brazil, far behind Mato Grosso and Paraná, they are where soybean expansion is the greatest.

For another analyst, Fernando Muraro, the problem with the exchange rate compounds itself. With a strong real, all new productive regions in Brazil are affected. Producers' loss of income due to the weak dollar is devastating. Because of that, farmers do not use as many inputs in the field as they should. Therefore, yields drop even more.

Analysts say that farmers shoulder some of the blame. Their lack of ability to read the market due to poor access to information or lack of interest has lead to bad marketing decisions. The lack of an effective support chain that informs Brazilian farmers also contributes to the grim picture.

Numbers show that Brazilian producers are tough to beat in productivity. But their mistakes in commerce are common. Because of that, one analyst says farmers in Brazil won't be able to pay for about 40 percent of their short-term costs.