Aspects and Business Opportunities of Alpaca Ownership
American and around the world people call alpacas "The world's finest livestock
business" Alpacas share many of the same attributes of gold, real estate,
oil and stocks - all of which are supposed to increase in value over time. In
spite of the global economic downturn alpacas are still in demand. The fiber
they produce has unique qualities and is used by designers in the fashion
centers of New York, Tokyo, Paris and Milan to produce high-end garments.
up alpaca breeding is relatively straightforward. They are easy to transport,
have a relatively long and trouble-free reproductive life span, and alpacas can
be fully insured against loss. Breeding alpacas offers an excellent
opportunity to create a profitable business. Along with the profits, alpaca
breeding is treated as any other livestock business by the IRS including tax
advantages and incentives that you may qualify for.
livestock breeding and ownership characterized someone of wealth and status in
many cultures including our own early Western Expansion days. Today in
America, wealth as a result of livestock ownership is not as common, but
opportunities do exist to create a profitable farm breeding and raising
alpacas. Tending to a graceful herd of alpacas can be an exciting way to earn a
source of revenue and live a rewarding lifestyle.
in 1984, Peru Chili and Bolivia began allowing exportation of alpacas and at
the same time countries such as the U.S., Canada, Australia, New Zealand,
England and many European countries allowed their importation. This was the
beginnings of each country’s foundation herd... In more recent years even
Japan and South Africa have begun to build their own national foundation herds.
What makes this animal so desirable? The bottom line: alpacas can be both
profitable and enjoyable.
Who Buys Alpacas In America?
People come to alpaca breeding from
all sorts of prior experiences and alpacas are becoming an important source of
income for many people. Alpaca breeding is a very scalable business. We are
part-time alpaca breeders even though we have more than 75 animals on the farm;
while others may be able to create a full-time business by raising far fewer
animals. The circumstances and situations people bring to the alpaca industry
are varied: couples with young children, retired couples, and everyone in
between can find their own, comfortable level of engagement. Fiber artists and
hand-spinners have become alpaca owners as well as practicing veterinarians.
While most alpaca owners and breeders have an acre or two or more in the
suburbs or country there are a growing number of owners who board or ‘agist’
their small herds on a nearby farm while they maintain their city lifestyle.
For everyone who enters the alpaca business, these beautiful animals allow you
to diversify your income stream with a commodity that is functional, rare and
entertaining all at the same time.
Our farm of 75 plus alpacas and
over 40 acres puts us in the large end of the range of all alpacas breeders
though there are a few with over 500 alpacas and the largest, Magical Farms in
Ohio, with more than 1,500 alpacas. There are many alpaca farms with only two
or three alpacas though the national average falls into the ten to 20 alpaca
range. Most herds start out small and grow to the size that fits the breeder's
farm and financial goals.
We, like most alpaca breeders, are
in business for the long haul. In spite of the current economic downturn we believe
in the future of the industry. With the relatively small number of alpacas
currently available, there will be an extended and steady demand for breeding
stock to continue meeting the needs of our growing industry for many years. It
is important to recognize that alpaca ownership has inherent risks, as do all business
opportunities. We encourage you to talk to breeders to familiarize yourself with
the risks as well as the rewards of alpaca ownership.
Alpaca Supply and Demand
The market for alpacas has been
moderated by the effects of relatively slow herd growth. As of early 2009, the
total population of registered alpacas in North America is over 151,377 as
reported by the Alpaca Registry, Inc.
Supply will continue to be limited
in the near future for a number of reasons:
reproduce slowly. A female generally breeds for the first time between 18-24
months of age, is pregnant for 11-12 months, and almost always only has one
cria per year.
retain their offspring to build their herds.
·The limited size
of the national herds in each country outside of South America will restrain
growth to a small degree.
·The U.S. alpaca
registry is closed to further importation to protect our national herd, which
will further moderate U.S. herd growth.
Meanwhile, demand for alpacas and
their fiber has increased dramatically every year since their introduction
outside of South America in1984. Because alpacas can be raised on such small
acreage and in numbers there has been continual growth in the numbers of breeders
entering the alpaca market each year here in the US. This parallels the
experiences in other countries with alpaca herds such as Canada, New Zealand
and Australia. And, this is in addition to the countries that are just
beginning to establish their national herds. This growth is sure to continue as
the alpaca gains international recognition.
Alpacas offer an outstanding business
opportunity for livestock ownership. They have long been known as the
aristocrat of all farm animals. Most of all, alpacas have a charismatic manner,
they do very well on small acreage, and they produce a luxury product which is
high in demand.
on our experience we believe that an alpaca breeder with a small herd on a
small acreage can expect to harvest his animals' fleeces and sell their
offspring profitably. The value of alpaca fleece and finished products made
from that fleece is the economic underpinning of the future market for alpacas.
Breeders outside of South America are beginning to organize fiber co-ops for
the commercial processing of the fleece. Here in the US, our fiber is often
sold to cottage industries that revolve around hand spinning, weaving and
knitting. Our animals produce around five to thirteen pounds of fleece a year.
Alpaca breeders can sell their fleece in a variety of ways including raw fiber,
washed and carded fiber, yarns, and finished products, with lucrative margins.
Profits or fiber production vary based on each farm's model for fiber sales.
At Sugarloaf Alpaca Company we are building a business model of vertical
integration that will eventually bring in-house all steps in the fiber process
from raising and shearing the animal to washing, and processing the fiber to
creation of end products.
current alpaca industry is based on the sale quality breeding stock, which
commands premium prices. Female alpacas usually begin breeding at between 15
months and 18 months of age, while most males can successfully impregnate (or
"settle") a female at about three years. The females produce one baby
per year (twins are uncommon) during a reproductive life about 10-16 years
based on our breeding experience.
that influence individual alpaca prices include color, conformation, fleece
quality and quantity, age, gender and heritage or lineage. Females sell for
more money on average than males, but herd sire quality males have historically
commanded the highest individual prices. Breeders often prefer one alpaca color
to another, however the parents' color does not necessarily guarantee a cria of
the same color. There are many accepted theories regarding alpaca color
heritability, and more research is needed to further our understanding of this
issue. Of more importance to most breeders is the overall physical soundness,
or "conformation" of the animal. In addition to color, fleece,
density, uniformity, fineness, luster and staple length will also affect value.
Well-conformed alpacas with superior fleece characteristics sell for higher
breeders start with several breeding age females and perhaps one male. Other
new breeders may elect to start with several young animals or a breeding pair.
There is an approach suitable for your level of interest and financial
position. Alpacas are much like diamonds. The market pays a premium for the
finest examples of the breed, and a beauty is also in the eye of the beholder.
benefit of owning alpacas relates to the concept of compounding. Savings
accounts earn interest, which if left in the account, adds to the principal.
The increased principal earns additional interest, thereby compounding the
investor's return. Alpaca breeders also witness the effects of compounding over
time. Alpacas reproduce almost every year, and about one-half of their babies
are females. When you retain the off-spring in your herd, they begin producing
babies. This is referred to as "alpaca compounding."
wealth building is another "alpaca advantage". As your herd grows,
you postpone paying income tax on its increasing value until such time as you
begin selling the offspring. Most breeders elect to sell all or some of the
annual offspring production for practical reasons, such as recovering their
initial cash flow, acreage and building limitations, and time constraints.
are also fully insurable against theft and mortality. Insurance can be
purchased for your stock regardless of age. Average insurance rates are 3.25%
of the value of the animal, or $325 for every $10,000 of insurance.
Depending on your existing conditions
you may find that you have only a small investment to make to facilitate
breeding alpacas on your property. If you start as we did, with a corn field,
you’ll find prices for shelter, fencing and labor vary widely based on your location,
as well as your individual needs and tastes. For example, some alpaca breeders
will opt for a $500 carport structure as a shelter for their animals, whereas
others might spend upwards of $100,000 or more for a state-of-the-art breeding
facility and showplace. Additionally, fencing could add several thousand
dollars to your budget. If you manage the herd yourself, you'll require an
inventory of halters, shears, toenail clippers, lead ropes, and other
miscellaneous gear. These items would probably add $500 to your initial costs.
Insurance is a consideration, and generally costs approximately 3.25% of the
purchase price, paid each year in advance. If a person were to begin raising
alpacas at his or her own farm, a typical start-up budget might look like this
(prices estimated based on typical costs in the U.S.A.):
Acquisition of one
pregnant female and one young female
animals, one year
Small barn and
One year's feed
Hands-on Alpaca Ownership
are essentially two ways to own alpacas. The first approach is to simply
purchase the animals and begin raising them. The second approach is to purchase
the animals and place them in the care of an established breeder. This
arrangement for care and boarding of an animal on behalf of another is known as
agistment. Under this method you, as owner, typically would still make the
important decisions about care, breeding, sales, etc. At Sugarloaf Alpaca
Company we work with clients in both ways.
discussion will focus on the owner-raised scenario. We will work with you to
develop an analysis designed for your particular situation; however, you are
encouraged to independently develop your own financial analysis utilizing
professional support if necessary. Expenditure of funds warrants a full
assessment of risks. You need to establish a comfort level that this is the
right balance for your lifestyle.
the feasibility of alpaca ownership requires making a set of assumptions.
Determining the costs associated with raising the animals and how much they
might sell for in the future are the basic elements used in projecting a return
on your investment. The assumptions found here are estimates based on many
hands-on method of raising alpacas, as either a part- or full-time business,
requires that you eventually own a small farm or acreage. The property would
need to be properly fenced and have a small barn or shelter. Many new owners
already have outbuildings suitable for alpacas. The alpaca owner is presumed to
supply the day-to-day labor
new buyers start with a breeding pair or two females (and purchase stud
services). The financial returns are similar at different ownership levels, so
don't feel that you have to be a large farm to participate.
The major tax advantages of alpaca ownership include
the employment of depreciation, capital gains treatment, and if you are an
active hands-on owner, the benefit of off-setting your ordinary income
from other sources with expenses from your farming business. (See Tax Consequences of
The financial return using the agisted approach, should
you elect to board your animals, is also very good. We would be happy to
discuss agisting your alpacas here at Sugarloaf Alpaca Company.
Quality, color, gender of offspring, and strength of
the overall industry could influence results positively or negatively.
It is important that you make a purchase decision using
assumptions that reflect your personal tax and financial situation, as
well as your own assessment of the alpaca industry.
We offer financing terms that can ease your entry into
the alpaca business. Payment terms vary. Please ask us how we can help.
It is always wise to consider both
the upside and the downside of any potential purchase, it is important to feel
comfortable with a range of possible financial returns if your actual
experiences differ from your assumptions.
Tax Consequences of Owning Alpacas
If you are considering entering the
alpaca industry you should engage an accountant for advice in setting up your
books and determining the proper use of the concepts discusses in this
brochure. A very helpful IRS publication, #225, entitled The Farmer's Tax
Guide, can be obtained from your local IRS office. The goal of this discussion of
IRS rules is to provide the guidelines for discussion with your accountants and
financial advisors so that you can be more conversant in the issues of taxation
as they relate to raising alpacas.
Raising alpacas at your own farm, in
the hands-on fashion, can offer you some very attractive tax advantages, It
alpacas are actively raised for profit, all the expenses attributable to the
endeavor can be written off against your income. Expenses would include feed,
fertilizer, veterinarian care, etc., but also the depreciation of such tangible
property as breeding stock, barns, and fences. These expenses can also help
shelter current cash flow from tax.
The less active owner using the
agisted ownership approach may not enjoy all of the tax benefits discussed here
but many of the advantages apply. For instance, the passive alpaca owner can
depreciate breeding stock and expense the direct cost of maintaining the
animals. The main difference between a hands-on or active alpaca breeder and a
passive owner involves the passive owner's ability to deduct losses against
other income. If you are a passive investor may only be able to deduct losses
from investment against gain from the sale of animals and fleece. The active breeder
can take the losses against other income.
Alpaca breeding allows for
tax-deferred wealth building. You can purchase several alpacas and then allow
the herd to grow over time without paying income tax on its increased size and
value until he or she decides to sell an animal or sell the entire herd.
To qualify for the most favorable
tax treatment as an alpaca breeder, you must establish that you are in business
to make a profit and you are actively involved in you business. You cannot
raise alpacas as a hobby farmer or passive investor and receive the same tax
benefits as an active, hands-on, for-profit farmer. A farming operation is
presumed to be for-profit if it has reported a profit in three of the last five
tax years, including the current year
If you fail the three years of
profit test, you may still qualify as a "for-profit" enterprise if
your intention is to be profitable. Some of the factors considered when
assessing your intent are:
·You operate your
farm in a businesslike manner.
·The time and
effort you spend on farming indicates you intend to make it profitable.
·You depend on
income from farming for your livelihood.
·Your losses are
due to circumstances beyond your control or are normal in the start-up phase of
·You change your
methods of operation in an attempt to improve profitability.
·You make a
profit from farming in some years and how much profit you make.
·You or your
advisors have the knowledge needed to carry on the farming activity as a
·You made a
profit in similar activities in the past.
·You are not
carrying on the farming activity for personal pleasure or recreation.
You don't have to qualify on each of
these factors - the cumulative picture drawn by your answers will provide the
determination. Once you've established that you are raising alpacas with the
intent to make a profit, you can deduct all qualifying expenses from your gross
If you are a passive investor, you
are still allowed the tax benefits discussed below. The issue is whether you
will be able to take the losses on a current basis. All the losses can be taken
against profits or upon final disposition of the herd. The discussion from here
forward presumes you are a cash basis taxpayer and you keep good records.
Accrual basis taxpayers would also be allowed the same tax treatment, but their
timing might be different.
First, the following items must be
included in both a passive owner's and a full time farmer's gross income
·Income from the
sale of livestock
·Income from sale
of crops, i.e. fiber
other sources, such as services
The following expenses may be
deducted from this income. Please note, if you are agisting your animals, not
all of these deductions may apply on a current basis:
for all farm business (IRS publishes current rate)
·Fees for the
preparation of your income tax return farm schedule
·Labor hired to
run and maintain your farm
·Farm repairs and
·Rent and lease
animals used for breeding
real property improvements such as barns and equipment
investment-related travel expenses
expenses, which improve your farming or investment expertise
·Farm fuel and
chemicals, i.e., weed killer
Please note: For hands-on breeders, personal and
business expenses must be allocated between farm use and personal use; only the
farm use portion can be expensed for such expenses as a telephone, utilities,
property taxes, accounting, etc.
Once active alpaca breeders have
determined their net income or loss, it is included on their tax return as an
addition to or a deduction from their ordinary income. Losses can be carried
back for three years and forward for 15 years. To deduct any loss, you must be
at risk for an amount equal to or exceeding the losses claimed. The "at
risk" rules mean that the deductible loss from an activity is limited to
the amount you have at risk in the activity. You are generally at risk for:
·The amount of
money you contribute to an activity
·The amount you
borrow for use in the activity
The passive owner's losses that are
in excess of current income can be carried forward and taken against future
income. In other words, the passive owner does not lose the deductibility of
expenses, but the timing of the losses may be different.
All taxpayers must establish the
cost basis of their assets for tax purposes. This basis is used to determine
the gain or loss on sale of an asset and to figure depreciation. In determining
basis, you must follow the uniform capitalization rules found in the IRS code.
Animals raised for sale are generally exempt from the uniform capitalization
rules, and there are other exceptions for certain farm property. You need to
become familiar with these rules.
Once you've established the cost
basis of your various assets, you take a deduction for depreciation against
your annual income. This process allows you to expense the historic cost of an
asset to offset present income. The effect is to create non-taxable cash flow
on a current basis. This benefit is especially attractive in an environment of
Alpacas in which you have cost basis
can be written off over five, seven, or ten years if they are being held as
breeding stock. There are several methods of writing them off, beginning with
the straight-line method, which allows you to deduct one-fifth of their cost
each year, except the first year, in which the code allows for only six months
of write-off. There are also several accelerated schedules that allow for a
larger percentage of the asset to be written off early. Alpaca babies produced
by your females have no cash basis and cannot be written off, although they may
qualify for capital gain treatment on sale.
Capital improvements to the active
or hands-on alpaca breeder's farm can also be written off against income.
Barns, fences, pond construction, driveways, and parking lots can be expensed
over their useful life. Equipment such as tractors, pickups, trailer, and
scales each have an appropriate schedule for write-off. The depreciation schedule
for each asset class varies from three years to 40 years.
There is also a direct write-off
(expense) method known as Section 179 that allows a substantial deduction each
tax year for newly acquired items that are normally long-term depreciable
assets. While this is subject to several limitations, it is widely utilized by
small farmers to accelerate expense, if that is appropriate for your tax
situation. Owners currently in high tax brackets who are changing their
lifestyle in the next several years to a lower income level often use it.
The original cost basis of an asset
is reduced by the annual amount of depreciation taken against the asset. Other
costs add to basis, such as certain improvements or fees on sale. The changes
to basis result in the adjusted cost basis of the asset. Upon sale, excess
depreciation previously expensed must be recaptured at ordinary income rates.
The recapture rules are a bit complex, as are most IRS rules, but the IRS
Farmer's Publication mentioned earlier explains them well.
When an asset is sold, for instance
a female alpaca that was purchased for breeding purposes and held for several
years, the gain or loss must be determined for tax purposes. If an alpaca was
purchased for $20,000, depreciated for two and a half years, or say 50 percent
of its value, and then resold for $20,000, there would be a gain for tax
purposes of $10,000. In other words, your adjusted cost basis is deducted from
your sale price to determine gain or loss.
Once you've determined the amount of
a gain, you must classify it as either ordinary income or capital gain. The
sale of breeding stock qualifies for capital gains treatment (excepting that
portion of the gain which is subject to depreciation recapture rules). Any
alpacas held for resale, such as newborn crias that you do not intend to use in
your breeding program, would be classified as inventory and produce ordinary
income on sale.
This discussion of tax issues omits
a number of rules that could impact your taxes. Tax preference items, alternate
minimum taxes, employment taxes, installment sales, additional depreciation,
and other concepts of importance were not discussed. Whether we like it or not,
this is a complicated world we live in: it often requires the assistance of
professional accounting and legal assistance.
In summary, the major tax advantages
of alpaca ownership are the same as any livestock business and include the
employment of depreciation, capital gains treatment, and if you are an active
hands-on owner, the benefit of off-setting your ordinary income from other
sources with the expenses from your farming business. Wealth building by
deferring taxes on the increased value of your herd is also a big plus. It pays
to keep your eye on the tax law changes instituted by Congress.
Methods of financing your alpaca purchase
Most alpacas are sold for cash. Many
buyers convert other assets to purchase their first alpacas. Some people have a
line of credit for investment purposes; others use their equity in real estate
to secure funds. Some breeders offer financing for your purchase. It is
typically short term and involves paying for the animals before you take
delivery of them. For instance, many breeders will accept the following
of $4,500 each
Balance at delivery
For a financed sale, we require that
the purchaser obtain insurance for the animals with us listed as a co-insured
party and insurance proceeds distributed first to us to pay the remainder of
Creating your herd
determine your goals for alpaca ownership. Would you like to own an inexpensive
pair of gelding males for fiber production or as pets for you and your family?
Are you going to be a full-time or part-time breeder? Will you invest in
alpacas for current financial returns or are you going to build a herd toward
the goal of being a full-time breeder? Once you've decided on your goal, the
path to alpaca ownership will be more easily defined.
you're interested in acquiring a producing alpaca herd with immediate sales,
you may want to consider a larger initial outlay of late term pregnancy
females. In this scenario you would buy a number of pregnant females who would
deliver a cash crop of crias within a few months. This larger expenditure might
also encourage you to become more involved in the industry and spend more time
marketing your herd.
Some breeders with larger herds have full-time farm managers or hire additional
labor to assist them with the day-to-day chores. However you choose to be
involved, there is an "Alpaca Approach" suitable for you. The
industry is young and innovative strategies abound. Very few assets have the
potential to reproduce themselves every year as an alpaca does. Today's smaller
breeder can choose to be almost any size in the future. An owner, who likes the
return alpacas offer, or the lifestyle they provide, can choose any level of
Alpaca Purchase Contracts
prepare a written contract for every alpaca and breeding we sell. When
purchasing an alpaca our contracts allow you to have a veterinarian exam
certifying the alpaca's health at the time of purchase. Other clauses warrant
that if you are purchasing a breeding male he will, in fact, settle females and
that he is not sterile as a condition of birth. A contract for purchase of
female alpaca will warrant that she is anatomically complete and capable of
producing live offspring. If you are purchasing a pregnant female or a
breeding to one of our studs we will guarantee a live birth of the cria.
contracts specify the financial terms involved and include small details such
as who delivers the animals. It is important to know what happens if there is a
future problem with the alpaca that you purchase. For instance, a young male
could grow up to be sterile. This condition may not be known for one or two
years after purchase. Like us, most breeders will agree to replace the animal
if this happens.
are important so that all the elements of a purchase can be accounted for. It
is also important to deal with a breeder of good reputation, one who will
provide follow-up care. You are making a large purchase when you buy alpacas
and it's important that you feel good about it.
Many alpaca owners who have been involved in the alpaca lifestyle have
found it both personally and financially rewarding. Please recognize, however,
that owning alpacas involves significant financial risks, as does any business
start-up. Your ultimate success will be determined by your own ability to
market your animals: your fiber and finished goods: your employment of
available resources within the alpaca industry: your communication skills: and
your ability and willingness to provide top-notch customer service that results
in a good reputation. Although the information presented here discusses
techniques that many people have used to make alpaca breeding a profitable
business venture, it is, of course, impossible to guarantee the ultimate
success of any business.
preceding information was edited from the Alpaca Owners and Breeder’s