LCA: How to Invest in Agribusiness Letter of Credit
January 27, 2020
There are several types of investments available in the financial market. However, it is easy to get a little lost among so many possibilities. If you feel that way too, don’t worry. We are here to help you in this endeavor!
If you started researching investing, you may have heard about some acronyms. CDB, LCI, LCA and FGC are some examples that always come up when it comes to applying money.
Among these acronyms is the LCA, which means Agribusiness Letter of Credit. Keep reading to understand what this investment is, learn how to invest and find out what its main advantages and disadvantages are.
What is Agribusiness Letter of Credit?
Objectively, the LCA is a fixed income security issued by some financial institutions for the purpose of financing agricultural activities.
When you make an investment in this type of investment, it is as if you lend money to agribusiness representatives through a bank or broker, and get back your interest plus capital after the agreed time.
That is, you invest with the financial institution and this amount is passed on in the form of loans to people or institutions related to the agricultural sector.
Have you ever stopped to think about it? While you can monetize the money you have saved from your efforts, you will be helping to boost agribusiness activities in Brazil.
This sector, which some also call agribusiness, goes beyond cattle ranching and planting. It also covers activities related to the supply of seeds and inputs, equipment, processing of agricultural products, services related to these activities and also to the development of agricultural production.
All these activities have a great impact on the national economy and also on an international scale, since Brazil is a major producer and exporter of products such as soy and coffee. So being part of it, even indirectly, brings positive results not only for you, but for the entire country.
To understand in a practical way what LCA is and how it works, I listed below the main characteristics of this investment:
- It is exempt from Income Tax and IOF (Financial Transaction Tax)
- Your profitability can be post-fixed or prefixed
- It is a very secure application as it is guaranteed by the Credit Guarantee Fund (FGC)
- The minimum investment term is 90 days
As already noted, the Agribusiness Letter of Credit operates very similarly to that of the CBD. This is because the investor who buys LCA securities applies his money and receives a return plus interest in return. The bank then lends this money to farmers based on credit rights.
This way, your money will come in as the bank lends the capital to a third party (in this case, a rural producer), charging an interest rate that will be partly passed on to the LCA investor.
Despite being an investment modality, LCA may vary according to the application period and the remuneration rates. In any case, you need to know one important detail: the higher the value and the term of the application, the higher your yield.
The regards to the types of remuneration, there are three possibilities:
As its name implies, this security has the remuneration rate defined at the time of hiring. That is, you will already know exactly how much you will get back when the application deadline is over.
Post-fixed notes have the interest rate to be paid by the bank linked to an economy indexer. Most often, they are linked to the Interbank Deposit Certificate (CDI), but in some cases may also be linked to the Selic rate.
In this case, the portion of the rate paid by the bank to the investor will vary according to an economy index. (as in the default) and another portion of the interest will be predetermined in the contract (as in the fixed rate).
This type of ACL is a bit more unusual and usually requires a longer grace period. The grace period, for those who do not know yet, is a period required by some investments in which the investor should not redeem the amount until the date determined in the contract.
That’s why it’s very important to think through all the terms of an application before deciding which one is best for you. Have you considered investing in a three-year LCA, for example, and need the money before that?
You will need to look for another way to solve your situation as you will have some difficulty redeeming the capital invested in the LCA before the grace period ends.
In the case of the Agribusiness Letter of Credit, the minimum grace period is 90 days. That is, for three months you should not redeem the money.
So think carefully about the purpose of your investment so as not to allocate your money to an application that doesn’t fit your expectations. This advice applies to LCA and also to any type of investment, such as Treasury Direct and equities, for example.
Is investing in LCA safe?
This is a frequently asked question. When it comes to money, the fear of losing everything is very strong. That is why it is very important to know what are the risks linked to one type of investment.
As far as the LCA is concerned, the risk that many people have is if the bank with which the application was filed goes bankrupt. Seeing your money disappearing overnight would be a nightmare, wouldn’t it? But with the Agribusiness Letter of Credit, this will not happen.
I’ll explain why: Even if your investment bank crashes suddenly, your money is safe. The Credit Guarantee Fund (FGC), which I mentioned above in this article, guarantees up to $ 250 thousand per CPF and per institution.
Therefore, LCA is a very safe investment that has a higher return than savings and sometimes even surpasses CDB returns.
Advantages and disadvantages of ACL
You can see that this modality is very interesting, right? But not everything in the investment world is just flowers. It is very important to balance the pros and cons of an application.
To help you with this task, I have gathered the main advantages and disadvantages of the Agribusiness Letter of Credit. Check it out:
- Is exempt from income tax
- It is very safe as it is FGC guaranteed
- It has superior performance than the savings account
- Has positive impacts on the evolution of the agricultural sector
- The minimum amount to apply is usually higher than other investments.
- Minimum investment term required is 90 days
- Compared to LCI (Real Estate Credit Letter), LCA’s yield may be slightly lower
- Cannot be used as collateral for investing in equities.
Now that you know a little more about LCA, it’s easier to find out if this investment fits your financial goals. How about starting to plan your future and building an investment plan that’s right for you?