As a commercial lender, I have spent my entire professional career in the US banking industry. Over the past 25 years, I have reviewed countless business plans, witnessed a variety of enterprises and industries prosper and fail. From the outset, I have been trained in the conservative management of assets. I am by nature, and as a product of twenty-five years of training, very conservative when it comes to managing our family’s personal assets. Why would someone with my background farm alpacas rather than concentrate on traditional investments such as real estate, stocks, bonds and mutual funds?
The answer, aside from the sound fundamentals of the alpaca industry, is diversification and superior returns on investment. Of course, I believe that traditional investments are an important part of one's personal portfolio and Anita and I will continue to maintain positions in them. However, none of them offer us the potential to control our destiny by being actively involved in an exciting, growing industry while producing above average returns on a tax deferred basis.
Anita and I fit the alpaca owner/breeder profile to a tee. We love animals, are actively working our plan to build wealth and we pay our fare share of state and federal income taxes. I have to admit, in our lives, Anita and I have been extremely blessed. But, in building wealth, we have been continually frustrated by the impact our investments suffered by market conditions outside of our control. Terrorist attacks, oil prices, accounting irregularities and changes in consumer confidence all impact the value of these assets. In addition, taxes are a continual burden, reducing gains and further impeding growth. As saddened as I was with the events of September 11, 2001, I was extremely encouraged to find that the alpaca industry actually grew when all other financial markets suffered declines.
Anita and I were initially attracted to the alpaca business as we were looking for a way to enjoy our farm, produce superior financial returns, build wealth on a tax deferred basis and reduce taxes on our current income.
Why are alpacas such a superior business opportunity?
- Based on an alpaca’s quality, returns of 30% to 75% are not uncommon.
- Alpacas can be insured to protect the owner against loss due to death of theft.
- An alpaca’s offspring (cria), if bred properly, will have a market value equal to or greater than that of its mother.
- Alpacas are scarce due to the size of the domestic herd and their slow rate of reproduction. A female is generally bred at 12-18 months of age and can only produce one cria per year. Viable twins never occur. This supports price stability.
- The rate of growth in AOBA membership has consistently exceeded the growth of the domestic herd. This is evidence of the strong demand for elite fleece bearing animals.
- There is a strong demand for elite natural fiber which is driving the industry to grow and improve the herd. If compared to the market for wool, 2,000,000 alpacas will be required in order to support a domestic fiber industry. Today there are approximately 80,000 alpacas domestically. Based on the historic herd growth rate of 10%-15% per year, the demand for quality alpacas should remain strong for many years.
- Alpaca prices have remained stable for nearly twenty years. This is due, in part, to the single US registry (ARI) which is closed to imports. There is no risk of competing with cheap imitations and alpacas produce slowly.
Frequently Asked Questions
Who owns alpacas?
Alpaca owners and breeders come from all walks of life. Many have never owned livestock prior to owning alpacas. While there are a few large ranches which own hundreds of animals, most ranches are small and operated by working couples who manage their herds in the evening.
Are alpacas expensive to own?
Aside from the initial cost of an alpaca, the daily cost of ownership is relatively minimal. It is advisable to purchase mortality insurance which will generally cost about 3.3% of the purchase price of you alpaca. Therefore, the insurance premium on $25,000 would be $825.00/year. Feed will cost about $100.00 to $300.00 per year per animal depending on the availability of quality forage.
What are the financial benefits of alpaca ownership and breeding?
- More spendable income and tax deferred wealth accumulation!
- If you are currently paying income taxes and you plan to continue to pay them, you can reduce your tax burden by farming alpacas for profit.
- If you operate your alpaca farm on a for profit basis, IRS Section 179 allows you to deduct 100% of the cost of alpacas purchase, barns and other fixed assets in an amount up to $105,000. You can also depreciate the value of assets purchased in excess of the $105,000 deduction based on IRS rules plus all current period expenses such as feed, association dues, veterinary, etc.
- In addition, most states permit for profit businesses to make purchases on a sales tax-exempt basis resulting in significant savings.
For example, if your adjusted gross income is $150,000, your federal tax bill would be about $42,000. Since most alpacas sell for $12,000 to $25,000, let’s assume you purchase four alpacas for a total of $105,000. Based on the IRS Section 179 tax rules, the $105,000 expenditure would effectively reduce your taxable income and your tax rate. The effect would be as follows:
| Adjusted Gross Income | $150,000 |
| Section 179 Deduction | ($105,000) |
| Taxable Income | $45,000 |
| Total Tax (15%) | $6,750 |
| Tax Savings | $35,250 |
| Actual Cost of your Investment | $69,750 |
(This example is not
given as tax advice. You must consult your personal tax advisor
about the Section 179 and other rules regarding depreciable assets.)
Now, let’s assume that the four alpacas you own were bred at the time of purchase and they birth two female cria of a quality at least equal to that of the females. A calculation of your Internal Rate of Return (IRR) at the end of two years would be as follows:
| Value of alpacas purchased | $105,000 |
| Value of Cria | $52,000 |
| Total Value | $157,000 |
| Less Actual Cost | ($69,750) |
| Net Value | $87,250 |
| IRR | 41.50% |
The above does not account for the cost of feeding and insuring your alpacas plus any contingent cost such as veterinary. Assuming you insure your alpacas for the full purchase price, the annual cost of insurance and feed would be about $3,465.00 and $800.00 respectively.
What are the risks?
As with any business there are risks. Proper planning and education are critical to minimizing risks (see Getting Started). However, many of the obvious risks such as mortality and theft can be mitigated with insurance.
There is risk of loss due to sickness and disease. But, with proper care, these risks can be controlled. Also, breeding to achieve maximum genetic potential is important.
Therefore, it is advisable to seek out an honest and experienced breeder who can provide guidance and serve as a mentor.
Please call us, we would love to help!
What are the methods of ownership?
The two most common methods are direct ownership and alpaca partnerships. If you are interested in direct ownership but do not have the physical facilities to support an alpaca herd, boarding (agistment) may be an option for you. Many people who are just starting out like the comfort of an alpaca partnership. We have a number of friends with whom we own alpacas on a 50/50 partnership or shared ownership basis. This is especially attractive to people who want to take advantage of the financial benefits but have limited resources. It’s also a great way to diversify your interests by owning a share of a variety of alpacas (BCF 50/50 Program).
Can I finance my alpaca purchases?
Yes! In fact, installment purchasing is quite common. Generally, the seller will require a down payment with the purchase contract and monthly payments thereafter. Remember, there is a time-value attributed to money so an installment contract may require that you pay interest at a market rate (see BCF Benefits).
How do I sell my alpacas?
Alpacas can be sold thru a number of channels including auctions and private sales. Like any business, marketing is the key to success. The alpaca industry enjoys a robust market. One of the major channels of marketing is the internet. In fact, the majority of alpacas are sold over the internet sight-unseen.
How do get started?
Call us! We’d love to help you!