By André Ricardo Passos de Souza for Money Times
12/12/2023
The proper management of agricultural businesses is a crucial factor for success. In this way, it will be more beneficial if the business and institutional models can facilitate the execution of strategies from the commercial, operational and succession perspectives, especially for the Fiagros.
Thus, the discussion about the legal frameworks that facilitate production in the countryside, and how these tools can positively impact business management processes, is becoming increasingly relevant within the logic of the subject.
According to the Brazilian Agricultural Research Corporation (Embrapa), access to technology is seen as the main cause of the concentration of production and income in rural areas. In other words, the main problem is not the unequal distribution of land, as previously assumed.
In this sense, projects aimed at financing transportation and storage infrastructure, irrigation, production technologies, management and monitoring at all levels are absolutely essential to bring more income to the countryside and, consequently, to the city.
Another crucial angle in this discussion is that without productive efficiency, legal security (property and civil) and adequate infrastructure, it is becoming increasingly challenging to keep people in the countryside and guarantee the succession of properties.
According to the Brazilian Institute of Geography and Statistics (IBGE), around 77% of rural properties in Brazil are classified as family farms, i.e. they are directly managed and employ family labor. However, according to the institution, 70% of these rural properties do not survive the founder’s generation and only 5% make it to the third generation of family management.
According to the 2017 IBGE census, Brazil has just over 5 million rural properties and around 15 million rural producers operating them. Other studies show that only around 1% of farms account for approximately 50% of the Gross Value of Production (GVP), while the gross income of the remaining establishments does not exceed two minimum wages.
This reality makes succession in the countryside crucial for business continuity both inside and outside the gate. In this sense, the pejotization (or cotização) of the rural producer can help in this process.
The fiagros and pejotization
The pejotization or “cotization” of rural properties, the subject of this article, can become important tools in reversing this scenario, as they bring legal certainty, dynamism, negotiation flexibility and governance (clear rules for administration and management in the field), thus contributing to increased competitiveness for agribusiness.
These legal structures and tools can help rural entrepreneurial families to continue their businesses, without mischaracterizing the founders’ DNA and/or threatening the prosperity of their businesses.
A very interesting novelty is that what we are dealing with in this text, which is the pooling of assets through the constitution of a Fiagro, makes it possible to raise funds from the capital markets for investment in agribusiness, while at the same time providing an interesting option for investors from outside the agribusiness sector.
In a nutshell, the case of Fiagro (exempt from IR) consists of transforming the assets into quotas, in a number compatible with the market value of the assets, which are offered to investors. Income is obtained, for example, by leasing the land or another chosen model.
Some of the main benefits of this practice are
- Updating the potential difference between the real market value and the value documented in the deed, in most cases. This possibility increases the potential of assets for obtaining credit by increasing the supply of guarantees for contracting financing, for example, without the need to pay income tax, in some cases;
- The fragmentation of quotas for use as collateral is easier and less costly than the fragmentation of real estate registrations;
- Simplification of the succession process, as the property is divided into shares (rather than areas), optimizing its marketing and administration.
The 3 attributes listed above, especially numbers 1 and 2 which only concern Fiagros, according to Law no. 14.130/21. Thus, what we are calling “cotização” differs between Fiagro and Holding mainly in the final model for managing the rural business, in addition to the aspects mentioned in 1 and 2 above.
In the case of Fiagro, the assets will be paid into a fund, which will be structured using different commercial mechanisms. In the case of the holding company, the process consists of using a legal entity (CNPJ), known as pejotização, to hold and manage the rural producer’s assets. In addition, there are also distinctions in terms of updating the total value of the quotas, according to the accounting and regulatory rules that exist for both tools.
Financial modeling
The table below shows a financial model to compare the potential performance of both models with the share of equity in Fiagro or Agricultural Holding (pejotização), based on a standard business in the Midwest region of the country.
Fiagros are subdivided into those exempt and those not exempt from tax on quota income. The income tax exemption for Fiagro is only valid for products listed on the stock exchange and with more than 500 shareholders. In addition, for a shareholder to be exempt, they must own less than 10% of the total amount of shares in the fund. When applicable, the IR rate considered in the calculations was 20% of gross revenue.
As for the agricultural holding company (CNPJ), the tax considered in the study is calculated on the presumed profit of the legal entity at the effective rate of 14.53% (IR + CSLL + PIS + COFINS) on the gross revenue of the business, which in the case of the simulation is land rental, i.e. rental income.
Assumptions used in the simulation
Operational:
- Individual producer
- Region: Midwest
- Crop: soya
- Area: 5,000 ha
- Productivity: 70 bags/ha
Operation:
- Cost of production: R$ 5,000/ha (average harvests 18/19 to 22/23)
- COT of the module: R$ 25 million
- Soybean price: R$136/bag (average for the 18/19 to 22/23 harvests)
- Land value: R$ 50,000/ha
Legal:
- Market value of the property: R$250 million
- Δ real value x deeded value: 50%
- Value of the property in the deed: R$125 million
- Cost of georeferencing + CAR (Rural Environmental Registry): R$ 300/ha
- Cost of regularizing deeds: 2% of the value of the deed (total of R$ 2.5 million – registry office)
- Transfer of quotas (ITBI): 4% of the value of the deed (total of R$ 5 million)
- Variation in property value (real vs. deed): 50%
| Parameter*** | Fiagro model (IR exempt) | Fiagro model (without IR) | Agricultural Holding Model |
|---|---|---|---|
| More than 100 quotaholders | Less than 100 quota holders | ||
| Number of equity shares | 250.000.000* | 250.000.000* | 125.000.000** |
| Annual gross revenue (R$ million) | 47,6 | 47,6 | 47,6 |
| Total operating cost (TOC) (A) | 25 | 25 | 25 |
| Cost of paying up quotas (R$ million) B | 9 | 9 | 9 |
| Expenditure on taxes on revenue (R$ million) C | 0 | 9,5 | 6,9 |
| Operating result in year 1 (R$ million) (A-B-C) | 13,6 | 4,1 | 67 |
| Operating profit from year 2 (R$ million) (A-C) | 22,6 | 13,1 | 15,7 |
| Potential gross margin from year 2 (gross revenue/operating profit) | 47% | 27% | 33% |
*Number of quotas after land value update. Taxes are not levied on real estate profits when they are paid in, only when they are sold.
**The transformation of the assets into shares according to the value of the deed has been considered, otherwise the payment of IR on real estate profits should be immediate.
*** Until the publication of this article, the IRRF exemption on income is conditional on a minimum of 100 (one hundred) shareholders holding FIAGRO quotas, in accordance with PL no. 4173/23 which is awaiting presidential sanction.
Sources: prepared by the authors based on data from Cepea-Esalq/USP; Conab; IMEA and MAPA
The data in the table shows potential scenarios for the financial performance of agricultural businesses. The financial result will be translated into remuneration for investors, in the case of Fiagros listed on the market, or direct income for shareholders, when we look from the perspective of the Agricultural Holding Company.
In summary, from a financial perspective, the level of efficiency will depend mainly on whether or not Fiagro is exempt from income tax on gross revenue, which in turn will depend on the number of shareholders in the business model.
Which model should I use?
The model to be chosen, apart from the financial perspective, will depend on a number of other factors, mainly issues related to the following questions:
Management profile of the business: Generally speaking, quotas in a Fiagro model should be earmarked for businesses that can remain in the model for a certain period, compatible with the duration of the fund and with quotas traded on the stock exchange or not. The main idea is that these quotas can be incorporated mainly into investment products, as well as being used as guarantees for direct credit contracts. On the other hand, the agricultural holding company (pejotização) may have greater appeal for businesses that have purely family management and the main interest is focused on simplifying and making the succession and administrative process more efficient;
Business credit contracting profile: The leverage of the rural producer, the type of business (farming), the liquidity of the land and the governance structure defined for FIAGRO can determine the viability of the structure used;
Management and compliance costs: The structure to be used will depend on the value of the assets to be “quoted” or “pejotized” vis-à-vis the costs of implementing, maintaining, managing and complying with the structure. In other words, depending on governance, Fiagro’s structure and other factors, the tool in question tends to have higher management costs, administration, lawyers, mandatory auditing, Securities and Exchange Commission inspection fees, etc. than agricultural holding companies, which “carry” management and compliance costs compatible with CNPJs in general. These implementation and management costs were not represented in the calculations above, but would not significantly impact the conclusions presented in this article, especially in relation to the greater tax efficiency of FIAGROs compared to agricultural holding companies.
Therefore, as we have insisted, including in this space, there are tools available to the manager of businesses in the countryside that can help preserve family assets and the continuity of their businesses in the countryside.
Setting up a Fiagro or an Agricultural Holding Company are tools that can help rural producers’ families survive, professionalize and run their businesses, facilitating succession in the countryside and the administration and preservation of businesses over time with great efficiency, transparency and a level of governance that is compatible with the market’s requirements to ensure that agribusiness thrives in an increasingly strong market that is committed to the challenges of this third millennium.
*Article written by the author in co-authorship with Ana Palazzo, senior manager of projects and strategic planning for agribusiness.
Available at: Cotização x Pejotização: Fiagros as succession and management tools in Brazil’s agribusiness – Money Times
