What makes this animal so desirable?

Why do people in so many countries call alpacas the worlds finest livestock business? For
any business asset to be valuable, it must possess certain qualities that make it desirable.  
Gold is scarce, real estate provides shelter, oil produces energy, bonds earn interest,
stocks are supposed to increase in value, and diamonds symbolize love.

Alpacas share many of these same attributes.  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 fleeces are known in the fashion centers of New York,  Paris,  Milan,
and Tokyo.  

There are excellent profit opportunities and tax advantages available to alpaca breeders.  
Historically, the alpaca’s value has sustained ancient cultures, such as the Incas of Peru.
Today, alpacas represent the primary source of income for millions of South Americans.

History has validated the value of the alpaca.  Livestock has been a traditional
representation of wealth for many cultures around the world, long before financial stocks
were sold on the New York Stock Exchange.

The richest families of ancient times counted their wealth by the size of their flocks of sheep
or herds of cattle.  Today, wealth as a result of livestock ownership is not as common, but
opportunities do exist for profitable farms and ranches.  Tending to a graceful herd of
alpacas can be an exciting way to earn a source of revenue and live a rewarding lifestyle.

Since 1984, alpacas have appeared, almost simultaneously, in several countries where they
had never been seen before.  The U.S, Canada, Australia, New Zealand, England, and
many other European countries have all acquired the foundation animals for national herds.  
They are even beginning herds in Japan and South Africa, among others.

The bottom line:  alpacas can be both profitable and enjoyable. Finally, alpacas are easy to
transport, which makes it easy to move them from one location to another.  They have a
relatively long and trouble-free reproductive life span, and alpacas can be fully insures
against loss

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 has a city job, and the alpaca business is
managed by the other on their acreage in the suburbs or country.  A large number of
breeders are working couples who tend to their herd in the evening after work.  There are
even city dwellers who have discovered the option of boarding (or agisting) alpacas, thereby
giving them an operational alpaca business 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 demand worldwide. There are a few large ranches with
over 1500 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 into the size that fits the breeders 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
many years.

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 ownership.

Alpacas Supply and Demand:

The market for alpacas has been moderated by the effects of relatively slow herd growth.  
The total population of registered alpacas in North America accounts for fewer than 175,000
alpacas.  (For current statistics of the Alpaca Registry, Inc, see http://www.alpacaregistry.
net/statsitics.htm.).  Supply of alpacas will continue to be limited in the near futures for a
number of reasons:        
A)  Alpacas reproduce slowly.  A female generally breeds for the first time between 18 and  
24 months of age, is pregnant for 11 to 12 months, and almost always only has one   cria
per year. ·       
B)  Many breeders retain their offspring to build their herds. ·        
C)  The limited size of the national herd in each country outside of South America will
restrain growth to a small degree.         
D)  The U.S. and Canadian registries are both closed to further importation, which             
will further moderate North American herd growth.

Meanwhile, demand for alpacas has remained strong 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 in high demand.

Alpaca Values:  

An alpaca rancher 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 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 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 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 of about 15-17 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 parental 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 in
the overall physical soundness, or conformation of an animal.  

In addition to color, fleece density, uniformity, fineness, luster and staple length 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 $15,000 and
$30,000.  Females with unique attributes have been known to sell for $50,000 or more.

Proven, top-quality herd sires typically sell for $30,000-$60,000, and the highest quality
males with unique characteristics or exceptional offspring on the ground have sold in excess
of $500,000.  The current world record stands at $675,000 for a single herd sire.

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.  

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 investment 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 offspring 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.  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.

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.

In its early years, the U.S. Alpaca industry had the foresight to create a basic condition for
maintaining the value of its bloodstock, namely, a breed registry.  The Alpaca Registry, Inc.
(ARI) is a database housing the genealogy, blood typing and ownership records of alpacas
in North America and those of a few alpacas outside this area.  Since its inception in late
1988, the Registry has mandated blood typing as a requisite for registration and accepts
only offspring of registered alpacas that qualify by blood typing. Most alpaca breeders in the
U.S. have herds registered with ARI.  ARI registration provides the financial foundation of the
national breeding program. When purchasing an ARI-registered alpaca, the buyer is
assured of being provided a correct history of that alpaca based on DNA blood typing.  

In addition to being able to track and verify the genealogy of a particular alpaca, the
Registry allows breeders to track progeny as well.  An added benefit of ARI registration is
that it ensures a stolen alpaca can never be used in a breeding program and therefore has
only the value of a fiber producing non-breeder, thus making the theft of alpacas extremely
rare in the U.S.  

In the future, the Alpaca Registry is also likely to serve as the focal point for the physical
tracking of alpacas for disaster response and disease control.In general, ARI-registered
alpacas make up the vast majority of the U.S. Herd and sell for a considerable premium
compared to non-ARI registered alpacas.  New alpaca breeders should take note of the
value provided by the ARI registration process and should factor this into their research and
purchasing decisions.

Capital Requirements:

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 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
heard 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 the U.S.A.):

Acquisition of one pregnant female and one young female            $35,000           
Insurance on animals, one year                                                         1,000            
Equipment                                                                                              500           
Small barn and fences                                                                      30,000          
One year’s feed                                                                                     300            
Veterinarian and miscellaneous reserve                                             1,100            
TOTAL                                                                                            $68,000

(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, climatic conditions, health of animals, etc.)

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 and 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 is the right balance
for their lifestyle.  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

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 two females (and purchase stud services).  The financial
returns are similar at different ownership levels, so do not feel that you have to be a large
ranch to participate.

Financial Observations:

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 offsetting
your ordinary income from other sources with expenses from your ranching business. (See
Tax Consequences of Owning alpacas section of this article below.) ·       

The financial return using the agisted approach, should you elect to board your animals, is
also very good.  There are breeders who would be happy to discuss agisting alpacas on
behalf of prospective owners.
·    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.
·        Financing terms are available from some breeders and range from a few months to
two years or more.  It is always wise to consider both the upside and downside of any
potential purchase.  It is important to feel comfortable with a range of possible financial
returns if your actual experience differs from your assumptions.

Tax Benefits 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 discussed here.

A very helpful IRS publication, #225, entitled The Farmers Tax Guide, can be obtained from
your local IRS office.  The goal of this discussion of IRS rules is to provide 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,FiberAlso 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 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 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 and animal or sell the entire herd.

To quality for the most favorable tax treatment as a rancher, you mush establish that you
are in business to make a profit and 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 factors
considered when assessing your intent are:

You operate your ranch in a businesslike manner.

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 business.

You made a profit in similar activities in the past.

You are not carrying on the ranching activity for personal pleasure or recreation.  

You do not have to qualify on each of these factors, the cumulative picture drawn by your
answers will provide the determination.  Once you have 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 and a full time rancher
gross income calculation:

§        Income from the sale of livestock
§        Income from sale of crops, i.e. Fiber
§        Rents
§        Agriculture program payments
§        Income from cooperatives
§        Cancellation of debts
§        Income from other sources, such as services
§        Breeding fees

The following expense 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:

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 uses for breeding         
Depreciation of real property improvements such as barns and equipment       
Ranch or investment-related travel expenses        
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 telephone, utilities, property taxes, accounting, etc. 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 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 mush 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 have 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 taxes. 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 for 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 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, trailers, and scales
each have an appropriate schedule for write-off.  The depreciation schedule for each asset
class various 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-tern
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 Farmers 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 have 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 form other sources with 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 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 arrangement:

Purchase price:           $22,500

Down payment             $  9,000

Three installments of   $  4,500 each ($13,500)

Balance at delivery      $         0

For a finance 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 lien.

Alpaca Purchase Contracts:

Every purchase should require a written contract when acquiring an alpaca.  A typical
contract will call for a veterinarian exam certifying the alpacas 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 sale.

A contract for the purchase of a female alpaca will often warrant that she is
anatomically complete and capable of producing live offspring.

Contracts will specify the financial terms involved and included small details such as
who deliver 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 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
support.  You are making a large purchase when you buy alpacas it is 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 alpacas industry; your communication skills; and your
ability and willingness to provide top-notch customer service that results in a good

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.

Thanks to the AOBA Association for providing the above information
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

Once you have decided on your goal, the path to alpaca ownership will be more easily
defined.   If you are 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 large 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, smaller breeders 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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