Financial Aspects of Alpaca Ownership Article
Alpaca is a remarkable breed. Originating in South America, specifically
in Bolivia, Chile and Peru, these animals are rapidly gaining in
popularity throughout the world as a livestock breeding animal.
Frequently referred to as, "The World's Finest Livestock Investment,"
alpacas are raised for their wonderful fleece. Currently there are
approximately 90,000 alpacas in the United States and the demand for
them has increased dramatically every year since their arrival in 1984
from South America. Due to the strong interest in alpacas and the
limited number available outside of South America, there currently
exists an excellent breeding market opportunity in the United States.
Below are excerpts from the AOBA 1999 Breeder's Guide article:
Financial Aspects of Alpaca
Ownership. Should you wish to learn more about the Alpaca
I encourage you to contact me at
Why do people in so many countries
call alpacas, “The world’s finest livestock investment?” For any
investment to be valuable, it must possess certain qualities which make
it desirable. Gold is scarce, real estate provides shelter, oil produces
energy, bonds earn interest, and stocks are supposed to increase in
value, and diamonds symbolize love. Alpacas share many of these
Around the world, alpacas are in strong demand, and people pay high
prices for them. They are scarce, unique, and the textiles produced from
their fiber are known in the fashion centers of Paris, Milan and Tokyo.
There are excellent profit opportunities and tax advantages available to
Since 1984, alpacas have appeared,
almost simultaneously, in several countries where they had never been
seen before. The U.S., Canada, New Zealand, France, Australia and
England have all acquired the foundation animals for national herds.
What makes this animal so desirable? Bottom line: alpacas are both
profitable and enjoyable.
Alpacas are easy to transport,
which allows them to be traded across the country or around the world.
They have relatively long and trouble-free reproductive life spans and
alpacas can be fully insured against loss.
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Who Buys Alpacas?
Alpaca breeders come from many
walks of life. Increasingly, alpacas are becoming an important source of
income for many people. Entire families are full-time alpaca breeders.
Young couples with children might own three or four alpacas and enjoy
caring for them. Retired couples, who have raised their kids, sold their
business, and retired to the country, are often owners. The family whose
members include a hand-spinner might own two or three animals for fiber
production. Several breeders are veterinarians who have found the
ownership of alpacas to be more rewarding than practicing veterinary
medicine. Many herds are owned by families where one spouse works
outside the home, and the alpaca business is managed by the other on
their acreage in the suburbs or the country. A large number of breeders
are working couples who tend to their herd in the evening after work.
There are even city dwellers that have discovered the option of boarding
(or "agisting") alpacas, thereby
enabling city dwellers to maintain an alpaca operation while still retaining an
urban career. For all owners, alpacas offer a great way to diversify
their financial portfolio with a commodity that is both rare and in
There are few large ranches with over 500 alpacas, small ranches of only
two or three alpacas, and everything in between. The average alpaca herd
consists of about ten to twenty alpacas. Most herds start out small and
grow to the size that fits the breeder's ranch and financial goals.
Almost all breeders are in business for the long haul; they 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
It is important to recognize that alpaca ownership has inherent risks,
as do all livestock and financial assets. You should talk to breeders to
familiarize yourself with the risks as well as the rewards of alpaca
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Alpaca Supply and Demand
The market for alpacas has been
moderated by the effects of relatively slow herd growth. As of early
2006, the total population of registered alpacas in the United States is
estimated at 90,000.
Supply will continue to be limited in the near future for a number of
- The U.S. alpaca registry is
closed to further importation to protect our national herd, which
will further moderate U.S. herd growth.
- Alpacas reproduce at a rate
of 1 per year. 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.
- Many breeders retain their
offspring to build their herds.
Meanwhile, demand for alpacas has
increased dramatically every year since their introduction outside of
South America (1984). Not only are there more breeders entering the
alpaca market each year in established countries such as Canada, New
Zealand, Australia and the U.S., but there are more countries worldwide
also actively establishing alpaca herds. This growth is sure to continue
as the alpaca gains international recognition.
Alpacas offer an outstanding choice for livestock ownership. They have
long been known as the aristocrat of all ranch 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.
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An alpaca owner 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. Domestic fiber is often sold to cottage industries that revolve
around hand spinning and weaving. Each animal will produce around three
to ten pounds of fleece a year. Alpaca ranchers sell their fleece in a
variety of ways including raw fiber, washed and carded fiber, yarns, and
finished products, with lucrative margins. Profits of fiber production
vary based on each farm's model for fiber sales.
The current alpaca industry is based on the sale of 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 15 - 20 years.
Factors that influence individual alpaca prices include color,
conformation, fleece quality and quantity, age, and gender. 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 prices.
The range of value for females has remained fairly consistent during the
two decades that alpacas have been available to the public in North
America: generally between $12,000 and $40,000. Females with unique
attributes have been known to sell for $50,000 or more. Proven,
top-quality herd sires typically sell for $20,000-$50,000, and the
highest quality males with unique characteristics or exceptional
offspring on the ground have sold in excess of $150,000. Current record
is in excess of $600,000.
Many 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 beauty
is also in the eye of the beholder.
Alpacas 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.
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Another 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."
Tax-deferred 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.
The graph above illustrates how a herd might grow in size over a ten
year period, assuming you begin with five pregnant females and two
males. The herd growth depicted represents alpaca compounding at work.
The initial herd grows to 126 animals, assuming an 80% reproduction rate
and a 50/50 male/female ratio. Not many investments appreciate at the
Please note that this graph, while
clearly illustrating the principle of “alpaca compounding” does not
depict the average owners’ approach to alpaca ownership. 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 limitation, and time constraints.
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Creating a Herd
First, 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.
If you're interested in acquiring a producing alpaca herd with immediate
sales, you may want to consider a larger initial outlay. You would
probably buy a number of pregnant females who would deliver a cash crop
of crias immediately. 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 ranch 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 ownership.
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Hands-On Alpaca Ownership
There 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.
This discussion will focus on the owner-raised scenario. Many breeders
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. The buyer
needs to establish a comfort level that this is the right balance for
Analyzing 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 the investment. The assumptions found
here are estimates based on many breeders' experiences.
The hands-on method of raising alpacas, as either a part- or full-time
business, requires that the alpaca breeder own a small ranch 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.
Many 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 ranch to participate.
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Prices for shelter, fencing and labor
vary widely based on geographic location, as well as 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 ranch, a typical start-up
budget might look like this (prices estimated based on typical costs in
Acquisition of two
Insurance on animals, one year
Small barn and fences
One year's feed
Veterinarian and miscellaneous reserve
[Costs are rough estimates for comparison purposes only.
Actual costs may be higher or lower than figures depicted,
depending on a wide variety of factors such as geographic
location, available pasture, climactic conditions, health of
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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 arrangement:
1. Purchase price
2. Down payment
3. Three installments of $4,500 each
4. Balance at delivery
For a financed sale, a breeder may require that the purchaser obtain
insurance for the animals with the seller listed as a co-insured party
and insurance proceeds distributed first to pay the remainder of the
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Alpaca Purchase Contracts
Every purchaser should require a
written contract when acquiring an alpaca. A typical contract will call
for a veterinarian exam certifying the alpaca's health at the time of
purchase. Other clauses might warrant that a breeding male will, in
fact, settle females and that he is not sterile as a condition of birth.
A contract for purchase of female alpaca will often warrant that she is
anatomically complete and capable of producing live offspring.
Contracts will 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. Most breeders will
agree to replace the animal if this happens.
Contracts 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
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
this article 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.
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Tax Advantages of Owning Alpacas
Those considering entering the alpaca
industry 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 ranch, in the hands-on fashion, can offer
the rancher some very attractive tax advantages. If 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 rancher and a passive owner involves the
passive owner's ability to deduct losses against other income. The
passive investor may only be able to deduct losses from investment
against gain from the sale of animals and fleece. The active rancher can
take the losses against other income.
Alpaca breeding allows for tax-deferred wealth building. An owner 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 a rancher, you must
establish that you are in business to make a profit and you are actively
involved in your business. You cannot raise alpacas as a hobby rancher
or passive investor and receive the same tax benefits as an active,
hands-on, for-profit rancher. A ranching 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 ranch in a
- The time and effort you spend
on ranching indicates you intend to make it profitable.
- You depend on income from
ranching for your livelihood.
- Your losses are due to
circumstances beyond your control or are normal in the start-up
phase of ranching.
- You change your methods of
operation in an attempt to improve profitability.
- You make a profit from
ranching in some years and how much profit you make.
- You or your advisors have the
knowledge needed to carry on the ranching activity as a successful
- You made a profit in similar
activities in the past.
- You are not carrying on the
ranching 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
ranching alpacas with the intent to make a profit, you can deduct
all qualifying expenses from your gross income.
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 rancher's gross income calculation:
- Income from the sale of
- Income from sale of crops,
- Agriculture program payments
- Income from cooperatives
- Cancellation of debts
- Income from other sources,
such as services
- Breeding fees
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
- Vehicle mileage for all ranch
business (IRS publishes current rate)
- Fees for the preparation of
your income tax return ranch schedule
- Livestock feed
- Labor hired to run and
maintain your ranch
- Ranch repairs and maintenance
- Breeding fees
- Taxes and insurance
- Rent and lease costs
- Depreciation on animals used
- Depreciation of real property
improvements such as barns and equipment
- Ranch or investment-related
- Educational expenses, which
improve your ranching or investment expertise
- Attorney fees
- Ranch fuel and oil
- Ranch publications
- AOBA (breed association) dues
- Miscellaneous chemicals,
i.e., weed killer
- Veterinarian care
- Small tools
- Agistment fees
Please note: For
hands-on ranchers, personal and business expenses must be allocated
between ranch use and personal use; only the ranch use portion can be
expensed for such expenses as a telephone, utilities, property taxes,
Once active alpaca ranchers 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 ranch
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 higher
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 cost 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 ranch
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 ranches
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 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 ranching 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
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