Considerations: Alpacas as a Business

Congratulations on beginning your journey toward potentially adding alpacas to your world!

Being an alpaca owner provides unique and wonderful life experiences. People in many countries call alpacas “the world’s finest livestock.” Valuable business assets of any kind possess qualities that make them desirable: gold is scarce, real estate provides shelter, oil produces energy, bonds earn interest, stocks may increase in value, and diamonds symbolize love. Alpacas share some of these same attributes.

Alpacas are scarce and unique, and the textiles produced from their fleeces are in demand at fashion centers in New York, Paris, Milan, and Tokyo. There are excellent profit opportunities and tax advantages available to alpaca breeders. Historically, alpacas sustained ancient cultures, including the Incas of Peru. Today, alpacas still represent the primary source of income for thousands of South Americans. History has validated the value of the alpaca.

Long before stocks were sold on the New York Stock Exchange, livestock was a traditional form of wealth for many cultures. The richest families of ancient times counted their wealth by the size of their herds. Today wealth as a result of livestock ownership is not as common, but opportunities do exist for profitable farms and ranches. Tending to a herd of graceful alpacas can be an exciting source of revenue, and a rewarding lifestyle.

A key question to answer before starting a new venture is, WHY? Why are you considering becoming an alpaca owner?

Are you interested in?

  • Development of breeding stock?
  • Producing alpaca fiber for the commercial or cottage industry?
  • AOA Show System participation?
  • Augmenting an existing fiber production business?
  • The farming lifestyle?
  • The potential tax benefits of owning your own livestock business?

Alpacas offer an outstanding choice for livestock ownership. Alpacas have a charismatic manner, they do very well on small farms, and they produce a luxury product which is continually increasing in demand.

In researching the opportunities and gathering information to help with your decision making, it is recommended you visit as many farms in your local area as possible. Review the farm environment and operation of each, and ask the owners about their views of the alpaca industry. The AOA website, www.alpacainfo.com, and AOA's Alpaca Owners Guide are great tools to help you locate farms near you. In addition to researching the alpaca industry and relevant statistics, it is strongly recommended that you spend time with a business consultant or tax advisor to discuss your interest in starting an alpaca business.

Alpaca Ownership

Many breeders will work with you to develop a plan designed for your particular situation; however, you are encouraged to independently develop your own financial analysis utilizing professional support if necessary. As a buyer you need to be certain that starting an alpaca business is an appropriate use of both your time and financial resources.

Analyzing the feasibility of alpaca ownership requires making a set of assumptions. Determining the costs associated with raising the animals and how much revenue they might generate in the future are the basic elements used in projecting a return on the investment. The assumptions found here are 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, properly fenced with a small barn or shelter. Many farms already have outbuildings suitable for alpacas. The alpaca owner is presumed to supply the day-to-day labor.

A 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 make the important decisions about care, breeding, sales, etc.

Farm/Ranch Operation

You may have an existing farm to use for your alpacas, or you may be starting new. If you are starting new, please check your local and county ordinances to ensure that starting a farming operation on your selected property is allowed, and whether there are any constraints you need to keep in mind as you develop your business plan.

The organization of your farm will impact the efficiency of your day-to-day operations. As you are visiting other farms, take pictures of their set ups and ask questions about what they like about their setup, and what would they love to change.

Here are some considerations when planning your farm

Shelter for your Animals

Will you have a centralized barn or will you have multiple portable style shelters?

Paddocks and Pastures

  • Will you have grazing areas or will you feed hay every day?
  • What is the maximum number of alpacas you will have on your farm?
  • Will fencing be portable or fixed, or a combination of the two?
  • No one enjoys carrying water when they don’t have to; how will you deliver water to your alpacas?
  • If you have pasture available for the alpacas, you will want to plan on proper irrigation, fertilizing and potentially over seeding to keep the grasses growing as well as possible, and have a plan for keeping weeds under control.

Electrical Power

Think about putting electrical outlets close to your water tanks if you have freezing winters (unless you enjoy breaking ice), and close to your shelters in case you have very warm days and need to plug in a fan to help keep the alpacas cool.

Hay Storage

Hay Storage will be driven by the form of hay available to you and the type of equipment you have available for moving the hay—small square bales (55–100#); large square bales (3’x3’x8’); or round bales. It is important to ensure hay does not mold due to exposure to moisture, so proper storage is essential.

Manure Management

Have a plan for the disposal of your manure. It may be a stock pile you spread on your pastures and fields, or selling it to gardeners or nurseries. New manure will be created daily by the alpacas, and should be removed from their living area on a regular basis to minimize the risk of parasites.

Annual Shearing

Alpacas need to be shorn yearly for their health, and the collection of your annual fiber harvest. The shearing event is something you may hold on your farm, or you may take your animals to another location for shearing.

Feed Storage

In addition to pasture and hay, alpacas require supplements to guarantee they get essential vitamins and minerals. Some owners also provide extra supplements in the form of grain or pellets. Some farms will purchase pellet supplements in 50# bags, while others will buy in bulk and store the feed in large bins.

Herd Health

Alpacas need to have their toenails cut on a regular basis. In some areas they will need routine immunizations. Teeth trimming may be required. Assistance with birthing may be necessary. The ability to weigh alpacas is important in managing their health. Having an area where a scale and restraining chute can be set up is important.

Veterinary Support

Do you have a local vet to call on when required? Are you willing to administer injections or draw blood yourself?

Livestock Trailer

Every farm should be prepared for the need to get an alpaca from the farm to a veterinary office or local animal hospital for treatment. If you plan to participate in the AOA show system, the style and size of trailer maybe oriented to the number of animals you plan to show and the distance you are willing to travel to show them.

Equipment

Consider the use of tractors, UTVs, hay elevators, manure spreaders or brush hogs as tools for helping to manage the farm environment.

Pasture Irrigation

Retail Farm Store

Will you have a farm store where you can sell your fiber and fiber products? Will local zoning regulations allow retail sales from your location? Do you have a building that could be renovated to a store, or will you need a new structure?

Fleece Processing

If you are thinking of processing some or all of your own fiber, do you have space for washing, drying, dying or other value-added activities you may perform?

Prices for shelter, fencing, equipment, 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 could add $500 – $1000 to your initial costs.

Revenue Generation

A great advantage of the alpaca business is there are multiple opportunities for generating revenue. As you visit other alpaca owners, be sure to ask them about their revenue generation activities.

  • Are they selling breeding stock to other farms or new alpaca owners?
    • Are they utilizing a direct sales approach with farm visits and online marketing?
    • Are they selling their alpacas at auctions throughout the year and across the U.S.?
  • Are they selling fiber animals to fiber enthusiasts or as pets?
  • Are they selling raw fiber and fiber products? If so:
    • Are they using the cottage industry approach, putting personal time and energy into transforming raw fiber into sellable products?
    • Are they using a more commercial approach by sending raw fiber to the national collection process or one of the fiber co-ops across the USA?
  • Are they selling manure or manure products to garden enthusiasts?
  • Are they selling the meat and hides of alpacas they have culled from their fiber producing herd?
  • Are they caring for (agisting) alpacas owned by someone else?
  • Do they have herdsires others use for a stud service fee?
  • Are they helping others to sell their alpacas for a small percentage of the sale?
  • Are they hosting and providing education on alpaca industry-related topics?
  • Are they providing transport services to move alpacas from one farm to another?
  • Are they providing shearing services to other alpaca owners?

Any of these methods can work to generate income with alpacas. The key to success is finding the method(s) that work best for you.

Operational Expenses

Every business owner has operational expenses necessary to run their business. These are areas of expenses that should be considered as you research the alpaca industry.

Food and Nutrition

  • Alpacas are grazing animals, and the environment they live in will dictate the amount of hay they require. As an estimate, one ton of hay should be sufficient to feed two alpacas for a year, assuming there are no pasture areas to graze in.
  • Pellet supplements are often provided to ensure alpacas are getting vitamins and minerals necessary for a healthy lifestyle.
  • Mineral supplements made available for alpacas to consume when they choose are provided by most alpaca owners.

Shearing

  • Every alpaca needs to be sheared once a year. It is for their health as well as for the annual fiber harvest. Ask alpaca owners in your area about the cost of shearing and for suggestions on credible shearers.

Veterinary Costs

  • While the need for veterinary support will vary from farm to farm, it is safe to say that every farm needs to be prepared for emergency care.
  • Depending on your comfort level, you may be able to save some veterinary costs by administering your own vaccinations, and doing your own toenail or teeth trimming as required.
  • If you participate in the show system, plan on the need for a certificate of veterinary inspection for the animals traveling to the show.

Insurance

  • The cost of insurance needs to be considered to ensure your farm is covered from a liability exposure standpoint.
  • Alpacas are also fully insurable against theft and mortality. Insurance can be purchased for your stock. Average insurance rates are 4.25% of the value of the animal, or $425 for every $10,000 of insurance for one year.

Business Management

  • All businesses face the need to pay taxes. Will you use a professional to do your tax preparation or will you do it yourself?
  • Proper accounting is something the IRS is keen on, and is a best practice for any business venture. Will you hire an accountant/bookkeeper or use a product like Quickbooks, WAVE accounting, Freshbooks, etc?
  • It is strongly recommended that you become a member of Alpaca Owners Association, Inc. (AOA) and also join a regional affiliate of AOA.
    • The registration of your alpacas allows the industry to know that your alpacas exist and can be included in the national statistics. There is a fee to register alpacas.
    • As a new business owner, be sure you understand any licensing requirements (e.g., tax licenses, federal and state business identifiers, seller’s license or permit, etc)
    • Be aware of your local zoning regulations regarding a livestock business or opening a farm store for your fiber products.

If you are viewing this new relationship with alpacas as a business, it is essential to treat it as a business.

Other business considerations include

Labor

Will you be doing all of the manual labor, or will you be hiring individuals to help you, either occasionally or on a daily basis?

General Repairs

Plan on the need to repair equipment, fencing, water lines, or other items you and the alpacas regularly depend on.

Show System Participation

The AOA show system is a great way to market your alpacas and your farm. As a participant, you will have show entry fees, stall fees, and travel costs to plan for.

Fiber Processing

The alpaca fiber is your annual harvest and you should have plans for how the fiber will be utilized. How you have it processed is a personal preference, but everyone should consider having it processed in some manner.

  • If you plan to use a mill, there will be the cost of getting the fiber to the mill (e.g., shipping or personal drop off).
  • The cost of processing into batts, roving, or yarns will vary from processor to processor, so discuss processing costs with the mill owner you select. On average, this will be $25–$50 per pound, depending on the type of product created for you by the mill.
  • You may plan to process your fleece yourself. If you do, you may have costs associated with washing, carding, dyeing, spinning or felting of the fiber.
  • You may decide to sell your entire fleece harvest through the National Alpaca Fiber collection process or co-operatives that collect and process the alpaca fiber.

Marketing

Every business needs to market themselves and their products to attract new customers.

  • There are the traditional methods of marketing such as placing ads in magazines and local newspapers.
  • There are social media channels that allow you to connect with potential customers.
  • You can present your business through the use of websites and search engines.
  • Becoming involved with the local 4-H and school programs is a method of marketing to your local community.
  • Participating in local farmers markets, county fairs, craft shows, etc., are methods of presenting your alpaca business to new customers.

Financial Observations

The major tax advantages of alpaca ownership include depreciation, capital gains treatment, and, if you are an active hands-on owner, the benefit of offsetting ordinary income from other sources with expenses from your ranching business.

It is important to 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, in case your actual experience differs from your assumptions. Quality, color, gender of alpaca offspring, and strength of the overall industry could influence income results positively or negatively.

Tax Consequences of Owning Alpacas

Those considering entering the alpaca industry should engage an accountant for advice in setting up bookkeeping and determining the proper use of the concepts discussed in this brochure. A very helpful IRS publication, #225, “The Farmer’s Tax Guide,” can be obtained from your local IRS office.

Raising alpacas at your own ranch in the hands-on fashion can offer the active owner 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. These expenses can also help shelter current cash flow from taxes.

The less active owner using the agisted ownership approach may not enjoy all of the tax benefits, 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 deducting 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 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.

Once you’ve established that you are raising alpacas with the intent to make a profit, you can deduct all qualifying expenses from your gross income.

It is strongly recommended that you spend time with a tax and accounting specialist to understand the current IRS regulations and their applicability to an alpaca business.

Can Alpaca Ownership be Profitable?

Every startup business wants to know if they can be profitable and alpaca ownership is no different. The answer to the question is the same for any business: IT DEPENDS.

Can you keep the cost of ownership low and the revenue high? Reducing the cost of owning and raising alpacas is a key element for generating profits.

As for revenue, there are many potential methods of creating revenue and alpaca owners will choose the ones that they are most comfortable with. Generating revenue will require marketing and effort in order to acquire customers. The cost of marketing can be reduced by partnering with other farms.

With focused effort and the willingness to learn new skills, alpaca ownership can be profitable.

Summary

Many alpaca owners have found the alpaca lifestyle both personally and financially rewarding. As is true of any business start-up, owning alpacas involves a willingness to work and take financial risks. Your ultimate success will be determined by your ability to market your animals, fiber and finished goods, as well as your available resources, your communication skills, and your ability and willingness to provide top-notch customer service that results in a good reputation.

Work with your family, selected mentors and professional business advisers to develop an alpaca ownership plan that is best for you based on your current situation and goals. Although this article discusses different considerations for alpaca ownership, it is, of course, impossible to guarantee the ultimate success of any business.

AOA is dedicated to providing information and resources to help with research and decision making. AOA's website is a valuable tool in researching the industry.

Other Sources of Information:

  • Small Business Administration — visit your local chapter for information on classes and possible mentors.
  • Your local county or university Extension Service office.