About Alpacas

Reprinted from the Alpaca Owners and Breeders Association, Inc. (AOBA) website.

Welcome to the wonderful world of Alpacas!

Alpacas were a cherished treasure of the ancient Incan civilization and played a central role in the Incan culture that was located on the high Andean Plateau and mountains of South America. Alpacas were first imported to the United States in 1984. Alpacas are now being successfully raised and enjoyed throughout North America and abroad. There are two types of alpacas - the Huacaya and the Suri. The life span of the alpaca is about 20 years and gestation is 11.5 months. Alpacas eat grasses and chew a cud. They are about 36" tall at the withers and weigh about 150 pounds. They are gentle and easy to handle. Alpacas are safe; they don't bite or butt. Even if they did, without incisors, horns, hoofs or claws, little harm can be done. Cleanup is easy since alpacas deposit droppings in only a few places in the paddock. They require minimal fencing and can be pastured at 5 to 10 per acre.

Alpacas produce one of the world's finest and most luxurious natural fibers. It is clipped from the animal without causing it injury. Soft as cashmere and warmer, lighter and stronger than wool, it comes in more colors than any other fiber producing animal (approximately 22 basic colors with many variations and blends). This cashmere-like fleece, once reserved for Incan royalty, is now enjoyed by spinners and weavers around the world.

A Brief History of Alpacas

Alpacas have coexisted with humankind for thousands of years. The Incan civilization of the Andes Mountains in Peru elevated the alpaca to a central place in their society. The imperial Incas clothed themselves in garments made from alpaca and many of their religious ceremonies involved the animal. Museums throughout the Americas display textiles made from alpaca fiber.

The Spanish conquistadors failed to see the value of alpaca fiber, preferring the merino sheep of their native Spain. For a time, alpaca fiber was a well-kept secret. In the middle 1800's, Sir Titus Salt of London, England rediscovered alpaca. The newly industrialized English textile industry was at its zenith when Sir Titus began studying the unique properties of alpaca fleece. He discovered, for instance, that alpaca fiber was stronger than sheep’s wool and that its strength did not diminish with fineness of staple. The alpaca textiles he fashioned from the raw fleece were soft, lustrous, and they soon began making their mark across Europe. Today, the center of the alpaca textile industry is in Arequipa, Peru; yarn and other products made from alpaca are sold primarily in Japan and Europe.

Outside of their native South America, the number of alpacas found in other countries is extremely limited. In fact, 99 percent of the world's approximately three million alpacas are found in Peru, Bolivia, and Chile.

Introduction

The joy, ease of care and potential profitability of raising alpacas has attracted people from many walks of life to become breeders. For some, alpacas are a primary source of income, for others a part-time business venture, but a source of pleasure for both. Young couples with children can enjoy the benefits of owning and caring for alpacas as a rewarding family experience. People who have raised their kids and are seeking a business and lifestyle to enjoy as they approach retirement are often owners. Ultimately, whether making the switch from a fast-paced, corporate way of life, or adding alpacas to an already established rural setting, breeding these unique, gentle animals can provide both income and pleasure, all included in a peaceful, stress-free lifestyle.

This lifestyle is made possible since alpacas can be raised on relatively small acreage and they are clean, safe, quiet, intelligent and disease resistant. Alpacas have soft padded feet, are gentle on the land and can be easily transported.

Alpacas have brought impressive financial returns to families all across America, but it's the fun and hands-on nature of this lifestyle that has really captivated people searching for a simpler and more rewarding way of life. Even if you don't have the land and are committed to a full-time career, you can still begin your alpaca adventure by purchasing and boarding at a nearby alpaca farm or ranch.

Why do people in so many countries call alpacas, “The worlds 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, stocks are supposed to increase in value, and diamonds symbolize love. Alpacas share many of these investment 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 fiber are known in the fashion centers of 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, and today alpacas are the sustaining economic force for millions of South Americans. History has validated the value of the alpaca.

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.

The Alpaca Advantage

• Alpacas are safe, they don't bite or butt. Even if they did, without incisors, horns hoofs or claws, little harm can he done.
• Alpacas are small and easy to handle.
• Alpacas are useful: they produce fine and valuable fleece as well as make wonderful pets.
• Alpacas are intelligent, which makes them pleasant to be around and easy to train.
• Alpacas are beautiful; they come in over 22 colors, and are clean and pleasant to be near.
• Alpacas do not require butchering in order to be profitable.
• Alpacas do not require special shelter or care.
• Alpacas are considered disease-resistant animals, which lowers insurance and veterinarian costs.
• Alpacas are adaptable to varied habitat, successfully being raised from Australia to Alaska and from 15,000 feet to sea level.
• Alpacas are rare outside of South America and cannot be mass-produced.
• Alpacas require minimal fencing.
• Alpacas can be pastured at 5-10 per acre.
• Alpacas are easy to transport, which allows them to be traded across the country or around the world.
• Alpacas have a relatively long and trouble-free reproductive life span.
• Alpacas can be insured against loss.

Who Buys Alpacas?

Alpaca breeders come from many walks of life. For some, alpacas are a source of income, for others a source of pleasure. 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 handspinner might own two or three animals for fiber production. Several large 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 small acreage in the country. A large number of breeders are working couples who tend to their herd in the evening after work. All of these alpaca breeders, big and small, enjoy their animals and feel good about owning an investment they can hug.

Some owners don’t actually raise their animals on a day-to-day basis. They live in the city, and are building their herd toward the day they might change careers or retire to the country life. 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 large ranches with over 500 alpacas, and small farms of only two or three alpacas. The average alpaca herd is made up of about eight to ten alpacas. Most herds start out small and evolve to the size that fits the breeder’s farm and financial goals.

Almost all breeders are in business for the long haul; they believe in the future of the animal. With the 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 investments. It is recommended that you talk to breeders to familiarize yourself with the risks as well as the rewards of alpaca ownership.

Alpaca Supply and Demand

The developing market for alpacas has been restricted by lack of supply. There are approximately 38,496 Huacayas and 7,612 Suri alpacas in America. Until recently, there has been little aggressive marketing of the animal, very few auctions, and very little national media attention for the alpaca. Yet both North America and Australia have experienced exceptional demand for alpacas at very high prices. Canada has an active alpaca market, and many Canadians have recently purchased animals in the United States.

Supply will continue to be restricted in the near future for a number of reasons:

• Alpacas reproduce slowly.
• Many breeders retain their offspring, building their herds.
• Mass production of “cria,” or babies, via embryo transplant is not feasible, since there is no available supply of suitable host females.
• The limited size of the national herds in each country outside of South America will restrain growth for some time to come.
• The U.S. alpaca registry is closed to further importation to protect our national herd, which will further limit U.S. herd growth.

Alpacas offer an outstanding choice as a livestock investment. They have long been known as the aristocrat of all farm animals. But most of all, alpacas are easy keepers, they have a charismatic manner, they do very well on small acreage, and they produce a luxury product which is in high demand. Consumers are drawn to alpaca sweaters with just one touch. Alpaca is several times stronger and much warmer than sheep’s wool. The fiber itself is semi-hollow and makes very light, thermal garments. Alpaca fleece is easy to process and readily spins into both woolen and worsted yarn. Fabrics made from alpaca are sewn into the finest European suits and jackets.

Historically, alpaca production has been concentrated in the high Andes Mountains where pasture is limited. The worldwide population of alpaca is barely three million animals. As a result, alpaca is considered a specialty fiber with limited available supply. Alpaca fleece is comparable to cashmere in softness and is often mixed with other fibers, such as mohair, to vary the texture of the yarn produced. A strong domestic commercial market for large volumes of alpaca fleece is easily envisioned and a national fiber co-op is working with breeders large and small to see this vision become reality.

The potential market for an animal with the characteristics of the alpaca is vast. Alpacas are loved by their owners and respected by those who process or wear products made from their fleece. They are truly the world’s finest livestock investment.

An alpaca rancher with a small herd on a small acreage can expect to harvest his animals’ fleece and sell their offspring profitably. The value of alpaca fleece is the economic underpinning of the future market for alpacas. Breeders outside of South America are beginning to organize wool co-ops for the commercial processing of the fleece. Domestic fiber is often sold to cottage industries that revolve around handspinning and weaving. Most alpaca ranchers readily sell their fleece for $2 to $6 an ounce to local artisans. Each animal will produce five to eight pounds of fleece a year.

The current alpaca industry is based on the sale of quality breeding stock, which demands premium prices. Female alpacas begin breeding at between 14 and 18 months of age, while males begin breeding at about three years. The females produce approximately one baby per year during a reproductive life of 15-20 years.

The range of value for females is currently between $12,500 and $40,000. Females with unique attributes have sold for more than $40,000. Young, unproven high quality stud prospects routinely sell for between $7,500 and $25,000, and the highest quality males with unique characteristics or exceptional offspring on the ground have sold in excess of $100,000. 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.

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 day you retire?

Once you've decided on your goal, the path to alpaca ownership will be more easily defined. Maybe you've decided to start a small herd and let it grow over a period of time before retiring and living off the income the herd produces. If so, you'll have the power of compounding on your side.

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 cria 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 very young and represents a ground floor opportunity. Very few investments 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 investment.

Tax Advantages

By Mike Safley, Northwest Alpacas

Raising alpacas can offer the farmer some very attractive tax advantages. In 2003 those benefits got a lot better due to the "Jobs and Growth Reconciliation Tax Act" which was enacted into law on May 28, 2003. The new rules have added several powerful incentives for people who buy alpacas. They are: 1) The 179 deduction has been raised from $25,000 to $100,000, and 2) The bill raised the 30% bonus depreciation to 50% in the first year of purchase. These benefits are for assets placed in service after May 5, 2003 and they expire in December 2004.

If alpacas are raised for profit, all the expenses attributable to the endeavor can be written off against your income. Expenses would include not only feed, fertilizer, veterinarian care, etc., but depreciation of such tangible property as breeding stock, barns and fences, all of which can help shelter current cash flow from tax. Beyond these basics there are several strategic tax advantages for the alpaca farmer.

The fact is that Uncle Sam will pay for a portion of the cost of acquiring your herd, assuming you are currently paying income tax and plan to continue paying income tax over the next six years. You can write 100% of your original purchase price off, up to a maximum of $100,000, in the year of purchase. If you are in the 45% tax bracket, the deductions for depreciation that the animals are eligible for may save you up to 45% in cash, of your original purchase price.

If you were to buy ten females for $150,000, pay $50,000 down, and take advantage of IRS code section 179 and the 50% bonus depreciation, insure the animals and finance the balance over 4 years, the government would give you a tax refund of $60,987 and you would have cash out of pocket of $5,719 in the first year. This assumes you are in a 45% tax bracket (state & federal). The total after tax cost of your $150,000 would be $106,798. In other words, your tax refunds would pay for $43,202 worth of your purchase.

Alpaca breeding also allows for wealth building, while deferring tax on your investment's increased value. A small farmer can purchase several alpacas and then allow their herd to grow over time without paying tax on its increased size and value.

IRS CODE SECTION 179 DEDUCTION

This deduction is available every year when you purchase IRS code 1245(a) (3) assets that are acquired for use in an active business [(Code Section 179 (d) (1)], assuming that you have not used the deduction on a computer or some other qualifying asset. Many people do not understand that you can use this deduction to write off your purchase of up to $100,000 worth of alpacas this year and that they can take another $100,000 deduction next year. The following example takes into consideration IRS code section 179.

In other words, if you are in the 45% tax bracket (state & federal) the government will reduce your taxes by 45% of the cost of $100,000 worth of alpacas. This deduction is available for all taxpayers. To see how much this will benefit you, simple calculate your state and federal tax bracket and multiply it by the amount of your purchase up to $100,000.

There are even more important changes for alpaca breeders in the recently enacted 2003 tax law. In an effort to stimulate the economy, Congress is giving taxpayers a bonus 50% first-year depreciation write-off for most new capital assets, including single purpose agricultural buildings placed in service after May 5, 2003, and before December 31, 2004.

There are several methods of writing alpacas 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 a prorated write off based on the month of your purchase. The net result of this method is that it takes six years to write off your alpacas, unless you buy them in January. The straight line system can only be used by making an election. There is also the modified accelerated cost recovery system using 150% declining balance and the half-year or mid-quarter convention (MACRS) which allows animals to be written off as follows: 15% year 1, 25.5% year 2, 17.85% year 3, 16.66% years 4 and 5, and 8.33% year 6. This is an accelerated schedule allowing for a larger percentage of the asset to be written off early. The MACRS system is the system preferred by the IRS since it does not require an election. Alpacas born at your ranch have no cost basis and cannot be written off, although they may qualify for capital gain treatment on sale. The costs related to financing or interest on your purchase is also deductible. Many people pay cash for their animals so writing off the interest is not an issue. The following examples articulate the benefits of tax deductions derived from an investment in alpacas. The examples do not include expenses for feed, veterinarian care, supplies, and transportation.

Capital improvements to your ranch can also be written off against income. Barns, fences, pond construction, driveways, parking lots all 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 varies from three years to forty years. A barn or special purpose agricultural building can be written off pursuant to Section 179 in the year it is put in service. If you do not chose to write the barn off as a Section 179 asset then you can depreciate it and take advantage of the bonus depreciation. To qualify for a 179 deduction it must be put in service after May 5, 2003 and before 2005.

In summary, the major tax advantages of conducting an alpaca business include the employment of expensing capital assets depreciation, capital gains treatment, and the benefit of offsetting your ordinary income from other sources with losses from your farming business. Wealth building by deferring taxes on the increased value of your herd is also a big plus. It pays to keep your eye on the tax law changes instituted by Congress. On occasion, like in the year 2003, you may find a silver lining in the clouds of government.

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YOSEMITE VALLEY ALPACAS

7913 Hunters Valley Road

Mariposa, CA 95338

209-376-2428 Phone & Fax

JCBryant@YosemiteValleyAlpacas.com