Created by Law 14,130/2021 in March 2021, Fiagros began on October 14, 2021, with the sale of shares of Riza’s fund (RZAG11) on B3 S/A. Now, just after a little more than two years of its existence, the Brazilian Securities and Exchange Commission (CVM) regulation for these funds will undergo relevant changes. Something that can further boost these private credit vehicles for Brazilian agribusiness.

The Investment Fund for Agro-industrial Chains, or Fiagro, is a financial instrument that aims to raise funds from investors for investment in agribusiness assets, whether in rural properties or activities in the sector. Investments involve a variety of assets, such as credit rights, real estate, securities, and shares in companies, if they are related to the agro-industrial production chain.

Among the advantages of investing in Fiagros is the possibility of acquiring shares of funds that can mitigate risks and are less susceptible to the country’s macroeconomic fluctuations. This is because the funds seek to diversify among the roles, sectors, and regions of the country so that isolated problems of a company (i.e., a judicial reorganization), a sector (i.e., an international embargo), or climatic issues of a region (i.e., a drought) do not generate significant losses for the fund. In addition, it is worth remembering that many products and services in the agribusiness chain have pricing indexed to commodity prices and the dollar, and this allows financial returns to be obtained even in times of macroeconomic instability, which, for example, results in a currency devaluation.

In other words, Fiagro allows investors, both individuals and companies, to invest and benefit from business opportunities and the potential of the most solid and dynamic sector in the country with good liquidity because, in the case of funds listed on the stock exchange, it is possible to sell the shares and receive the amount in a few days.

It is an attractive investment, especially for non-resident investors in Brazil. This is because Fiagro allows the diversification of investments with straightforward access to Brazilian agribusiness. Fiagro’s differentiated structure, which encompasses various categories of investments linked to agribusiness, offers a balanced composition of assets, enabling income from multiple sources, whether sales or leases of rural properties or capital gains through securities. It is worth noting that, even for non-resident investors, the tax advantages can be significant, especially considering that individuals are exempt from income tax under certain conditions that will be set out below.

Fiagro’s numbers

There are three types of Fiagro:

1. Credit Rights (Fiagro-FIDC): Focused on agribusiness and credit rights, according to ICVM 356.

2. Real Estate (Fiagro-FII): Directed to real estate assets and securities, following CVM Instruction 472.

3. Holdings (Fiagro-FIP): Invest in business holdings, following CVM Instruction 578.

Fiagros’ equity is around BRL 20 billion, of which 82% corresponds to real estate, 17% to credit rights, and only 1% to holdings. This amount may seem irrelevant considering the demand for credit from Brazilian agribusiness, which is more than BRL 1 trillion. However, this is just the beginning of a credit vehicle with excellent growth potential. To get an idea of this potential, it is worth noting that Fiagros reached in just two years the equity that Real Estate Funds took about ten years to achieve. In the last year, according to CVM data, between November 2022 and November 2023, the growth in Fiagros’ equity was 120%. The same development can also be seen in the number of funds. Today, there are 84 funds, while in 2022, there were 36 — a growth of 133%.

Regarding income distribuiton, the policy is established by the fund administrator, but most Fiagro managers follow the monthly income distribution protocol, which is similar to that adopted by real estate funds. Thus, Fiagro’s income from sales or leases of rural properties is regularly passed on to the shareholders. In turn, when Fiagro invests in securities, the income can come from distributions made by these assets and the spread between the buy and sell price (capital gain).

Another relevant point is that many funds have securities indexed to the IPCA and the CDI so that, like any fixed-income instrument, it benefits from a scenario with higher interest rates, as occurred in 2023. About two-thirds of the funds listed on B3 beat the CDI; the average return was 14.76% in 2023.

Changes for 2024

In 2024, Fiagros must undergo tax and regulatory changes. Regarding taxation, there will be a slight change from January due to Law 14,754, which became known as the “super-rich” tax law. This title certainly does not do justice, at least to the investors of Fiagros, since they are very democratic funds. After all, more than 700,000 investors are registered with B3, and these funds can be considered “cheap,” as many of them have quotas that can be obtained for values lower than BRL 10. Regardless of this debate, even after the change, Fiagros and FIIs continue to be exempt from Income Tax for the income of individuals if the fund is being traded in the over-the-counter market and has at least 100 shareholders on the date of income distribution. Previously, this number was 50 quota holders.

However, this change should have a minor impact because although these requirements hinder the constitution of new funds, the most recent figures show that all Fiagros available on B3 are traded monthly. Practically all of them can meet the minimum number of quota holders required for the exemption a few months after its launch. Three of the thirty-four funds traded on B3 have less than 100 shareholders, but they were funds launched a few months ago.

The most significant impacts on Fiagros in 2024 are expected to originate from changes in their regulation. In 2023, the CVM started a public consultation process to discuss a specific rule for Fiagro. The CVM will receive the suggestions until January 31, 2024, and the idea is to establish definitive regulatory parameters for Fiagros. However, some relevant changes can already be anticipated.

The first of these will be the possibility of setting up multimarket funds. Fiagro may be equated to multimarket funds, if they maintain a balanced exposure to the three risk factors that can be invested (real estate, receivables and equity), limiting for each of them one third of Shareholders’ Equity. There are still some doubts at this point, as the different types of Fiagro have distinct regulations, and which one will guide these multimarket funds has yet to be known.

Another novelty will be the possibility of purchasing financial and physical Rural Product Notes (CPRs) by the funds. This would allow the fund manager, for example, to receive goods, including working with stored products, and even encourage the issuance, by general warehouses, of Agricultural Deposit Certificate/Agricultural Warrant (CDA/WA). This change brings enormous potential for the growth of Fiagros since a stock of approximately BRL 300 billion CPRs has been issued. Of course, at first, it is expected that the negotiations will focus on financial CPRs, as the pricing and handling of physical products used as collateral would bring much greater complexity to the management of funds.

Another advance will be the possibility for Fiagros to acquire carbon credits in the compulsory and voluntary markets. In the case of the voluntary market, it will be possible to purchase Green CPRs from, for example, the restoration of native forests by rural producers. This will allow resident and non-resident investors to offset their emissions by acquiring Fiagros shares. Therefore, in addition to meeting the interests of investors concerned with sustainable development, the “green Fiagros” will allow the leveraging of projects based on ESG concepts of the most varied types. Thus, creating the necessary incentives for Brazilian agribusiness to be increasingly aligned with environmental issues.

However, it is important to note that the purchase of such credits by the funds will not be facilitated initially. The acquisition can only be made through an organized stock exchange or over-the-counter market. Currently, only the decarbonization credit (CBio) meets this requirement in Brazil. However, the carbon credit market is also developing, and as this market solidifies, new alternatives for the funds should emerge.

Perspectives

The prospects for the Fiagros are as good as they can be. In the short term, the funds should continue to benefit from interest rates set at a high level. The market expects a SELIC interest rate of 9% at the end of 2024, so the high profitability and, consequently, the funds’ attractiveness should be maintained.

Finally, there are good reasons to believe that the number of funds and their equity should continue to grow in 2024 and for the next few years because your assets are still far from Real Estate Funds. Although agribusiness has a share of approximately 25% of the Brazilian GDP and the real estate market about 10%, the equity of the Real Estate Funds is currently 13.5x the equity of the Fiagros. Secondly, Fiagros has great market potential, as many securities (CRAS, CDCAs, CPRs, etc.) can offer significant returns with a low risk. The volume of these papers should also grow, considering the need for private credit on the part of the entire production chain of Brazilian agribusiness, which is increasingly looking for alternatives to public credit rationing and credit provided by the financial system.

Therefore, 2024 promises to be an excellent year to start being part of this movement to expand Fiagros, which is undoubtedly a strategic and profitable alternative that allows resident and non-resident investors to enter Brazilian agribusiness with an attractive return perspective and, at the same time, considering Brazil’s relevance in world food production and its sustainable practices, it contributes to a global agenda to reduce hunger, poverty and preserve the environment.

Authored by

Cristiano Oliveira, Head of Research at Rivool Finance andAssociate Professor at the Federal University of Rio Grande — FURG.