1. What is it?
The Agricultural Credit Bill is a credit bond issued by private or public financial institutions (banks) and its main objective is to widen the horizon of resources available for agricultural funding. These bonds are linked to credit rights from business deals between rural producers. It’s like a sort of transfer of receivables to private investors before the receivable due dates. This transfer will allow for a greater volume of capital available to agribusiness agents. Those agents will then be able to increase the funding and credit offer for postdated purchases of rural products.
In other words, you lend money to the bank and, on its turn, the bank lends it to rural producers (based on credit rights) with the objective of financing activities relating to the production, sale, processing or industrialization of agricultural raw materials or products, or agricultural machinery and accessories.
Agricultural Credit Bills main objective is to widen the availability of capital to agricultural agents that offer credit to rural producers. These agents, through Agricultural Credit Bills, may renegotiate their receivables from business deals with rural producers to the institutional investors that may show interest. With this renegotiation of the credit rights before the due date, the agribusiness agents that fund and offer credit to agricultural producers will have more funds available before the set receivable deadlines. This will allow them to fund and offer more credit to agricultural producers, thus enhancing their cash flow.
The bonds are kept in custody of banks and their operations are registered with Central de Custódia de Títulos Privados – Cetip (or Private Bond Custody Center, in loose translation. This is an open society company that offers services to the financial market in Brazil). When launching an Agricultural Credit Bill the bank has no mandatory deposit requirements and the amount cannot, under any circumstances, exceed the total amount of its credit rights.
The profitability of an Agricultural Credit Bill is linked to the Interbank Deposit Rate. The longer the duration of the investment, the bigger percentage the bank pays on the Interbank Deposit Rate. Usually, Agricultural Credit Bills pay, on average, something along the lines of 93% of the Interbank Deposit Rate or more, always varying from bank to bank.
Risks linked to Agricultural Credit Bill are low. The greater risk is on the possibility of the bank offering the Agricultural Credit Bill going bankrupt. Even if that happens, Agricultural Credit Bills are guaranteed by the Credit Guarantee Fund for up to R$ 250 thousand per bank account. In other words, it’s a pretty secure investment that usually pays more that the common savings account and sometimes even more than the Bank Deposit Certificate.
There’s no taxation for normal persons, including income tax or tax on financial transactions (IOF, in Brazil).
For companies there’s no tax on financial transactions. However, companies are burdened with income tax, as per the following table:
- Investments of up to 180 days: 22,5% (only over profits)
- Investments from 181 to 360 days: 20% (only over profits)
- Investments from 361 to 720 days: 17,5% (only over profits)
- Investments over 720 days: 15% (only over profits)
5. How it works
To invest on Agricultural Credit Bills one needs a bank account in the bank with which they need to invest. After the account is operational, one needs only to transfer the funds and choose from the letters of credit portfolio available in your bank. They vary as per the duration and rate of return on the investment. The larger the amount and duration chosen, the more the bond will pay. Agricultural Credit Bills have daily liquidity and one can check the balance every day to evaluate the profitability of the investment.
- No tax on financial transactions burden;
- Is guaranteed by the Credit Guarantee Fund for up to R$ 250 thousand per bank account;
- No income tax burden for normal persons;
- Good investment option (indicated to help diversify your portfolio);
- Usually pays more than the common savings account and the Bank Deposit Certificate (due to the exemption from income tax);
- May be used as backing for stock exchange operations;
- Helps fund agricultural producers.
- Initial Investment slightly higher than other common investments;
- Income is usually slightly smaller than the real estate notes;
- Minimum term: 90 days.