Introduction
Why do people in so many countries call alpacas "The world's 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 alpacas' 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 have never been seen before. The U.S., Canada, Australia, New Zealand, England and many European countries have all acquired the foundation for national herds. There are even beginning herds in Japan and South Africa, among others. What makes this animal so desirable? 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 insured against lost.
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 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 who have discovered the option of boarding (or "agisting") alpacas, thereby giving them an operational 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 demand worldwide.
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 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.
Alpaca Supply and Demand
The market for alpacas has been moderated by the effects of
relatively slow herd growth. As of early 2015, the total population
of registered alpacas in
Supply will continue to be limited in the near future for a number of reasons:
-
Alpacas
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.
-
Many breeders
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 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.
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 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 or fiber production vary based on each farm's model for fiber sales.
The 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 10-12 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.
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 a 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 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. 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.
|
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
$600 carport structure as a shelter for their animals,
whereas others might spend upwards of $50,000 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
typically start-up budget might look like this (prices
estimated based on typical costs in the
|
|||
|
Acquisition of one pregnant female and one young female |
$
|
10,000 |
|
|
Insurance
on animals, one year |
$
|
500 |
|
|
Equipment
|
$
|
500 |
|
|
Small
barn and fences |
$
|
30,000 |
|
|
One
year's feed |
$
|
300 |
|
|
Veterinarian and miscellaneous reserve |
$
|
1,100 |
|
|
|
|
|
|
|
TOTAL |
$ |
42,400 |
|
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 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' 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.
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 off-setting your ordinary income
from other sources with expenses from your ranching business
(See Tax Consequences of Owning Alpacas.)
-
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 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
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, 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 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 you 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 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 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 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 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:
-
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
-
Interest
-
Breeding fees
-
Fertilizer
-
Taxes and
insurance
-
Rent and
lease costs
-
Depreciation
on animals used 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
-
Advertising
-
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, 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'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 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 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 cast 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 $10,000, depreciated for two and a half years, or say 50 percent of its value, and then resold for $10,000, there would be a gain for tax purposes of $5,000. 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 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:
1. Purchase price $9,500
2. Down payment
<-2,400>
3. Three installments of $2,366
each <-7,100>
4. Balance at delivery
-0-
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 lien.
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.