At the end of February, a very important event took place… The Snowmass Auction in Phoenix AZ. Most of us breeders use this event as a barometer about the price of alpacas for the year ahead. Based on the results of this event, the future looks bright, solid and prices are coming back up.

Two years ago, February 2008, the auction sales price for quality alpacas was the lowest in our industries history. There wasn’t even a Snowmass auction in 2009. However, 2010 is a very different story.

One of the reasons… in their own words: “Double “O” Good Alpacas is thrilled to announce that we are the proud new owners of Snowmass Matrix! We purchased Matrix at the Snowmass Making of Champions-Genetic Advancement Sale on February 27, 2010 for a record-setting price of $675,000, the highest selling alpaca at an auction!”

As I listened in to the live auction over the computer, I noticed that several farms bid quite high for this amazing stud. As the bids went over the half a million dollar mark, the energy got franetic! Gasps were heard and the auctioneer could hardly keep up with the increase of the bids. The serious bidding farms just kept the prices going up and up. Finally it was all over and it seemed unbelievable to realize that the final bid was $675,000!… however, Double “O” Good Alpacas feels that his worth is “PRICELESS!”

The future looks bright not only for prepotent MATRIX, but for our whole alpaca industry.

Next time I’ll comment on the high prices paid for some of the alpaca females sold at the auction.

Do you have an opinion on the results of the Snowmass Auction of 2010?

Julie

PHOTO:
Holding the newly acquired MATRIX, are the proud new owners, Ernie and Barbara Kellogg from VA standing next to the sellers, Julie & Don Skinner of Snowmass Alpacas.

Have you wanted to start an alpaca herd or expand your present one?
Have you thought that the average prices for good quality pregnant females were just too high for you?
Have you talked about your dream to others only to have it disintegrate before it got started?

Benefits of Starter Packages:

• Multiple alpacas for a single reduced price
• A variety of bloodlines and colors to grow your herd
• A variety of age and experience levels of females
• Sometimes the seller will include a complimentary male companion, or one at a very low price
• Depending on the circumstances, the seller may take financing and boarding as part of the arrangement

Basically a breeder puts together two or more females at a discounted price if you buy them all. The combination gives you a variety to start or expand your herd. You could get an experienced dam along with a maiden, or possibly two or more different colors or bloodlines. Often due to the circumstances you are able to purchase multiple alpacas at a price equivalent to a single alpaca.

Five years ago we started our herd with 4 pregnant females. We chose to take advantage of starter packages of quality females at reduced prices from two experienced breeders. Their herd reduction became our gain. Our decision enabled us to get a head start on building our herd with experienced pregnant dams that were expecting within six months. One of the pregnant females came with a female cria at side. So our single price purchase was really a 3 in 1. I strongly believe that a start-up breeder benefits from purchasing experienced dams along with maidens. If you have never birthed a cria – the experienced dams will teach you. And that creates peace of mind like you wouldn’t believe.

Alpacas4Less.com selects good quality alpacas that are owned by breeders who find themselves in the need of downsizing for a variety of reasons. After I personally interview them about their herd history, breeding and birthing experience, the seller and I come to an agreement on the best price for the animals. We then put a group together to create a starter package and offer them to you, our preferred clients. The price to you represents a recent reduction of at least 40% off or more. Generally speaking this is less than the breeder sells them to their own clients.

If you are looking for a way to grow YOUR herd. I highly recommend looking into starter packages.

Julie

The answers to some of the most asked questions about alpaca ownership follow:

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 discussed in this article. A very helpful IRS publication, #225, entitled The Farmer’s Tax Guide, can be obtained from your local IRS office. The goal of this discussion of IRS rules is to provide the guidelines for discussion with your accountants and financial advisors so that you can be more conversant in the issues of taxation as they relate to raising alpacas.

Raising alpacas at your own ranch, in the hands-on fashion, can offer the rancher some very attractive tax advantages. If alpacas are actively raised for profit, all the expenses attributable to the endeavor can be written off against your income. Expenses would include feed, fertilizer, veterinarian care, etc., but also the depreciation of such tangible property as breeding stock, barns, and fences. These expenses can also help shelter current cash flow from tax.

The less active owner using the agisted ownership (boarding) 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 cost basis and cannot be written off, although they may qualify for capital gain treatment on sale.

Capital improvements to the active or hands-on alpaca breeder’s ranch can also be written off against income. Barns, fences, pond construction, driveways, and parking lots can be expensed over their useful life. Equipment such as tractors, pickups, trailer, and scales each have an appropriate schedule for write-off. The depreciation schedule for each asset class varies from three years to 40 years.

There is also a direct write-off (expense) method known as Section 179 that allows a substantial deduction each tax year for newly acquired items that are normally long-term depreciable assets. While this is subject to several limitations, it is widely utilized by small ranches to accelerate expense, if that is appropriate for your tax situation. Owners currently in high tax brackets who are changing their lifestyle in the next several years to a lower income level often use it.

The original cost basis of an asset is reduced by the annual amount of depreciation taken against the asset. Other costs add to basis, such as certain improvements or fees on sale. The changes to basis result in the adjusted cost basis of the asset. Upon sale, excess depreciation previously expensed must be recaptured at ordinary income rates. The recapture rules are a bit complex, as are most IRS rules, but the IRS Farmer’s Publication mentioned earlier explains them well.

When an asset is sold, for instance a female alpaca that was purchased for breeding purposes and held for several years, the gain or loss must be determined for tax purposes. If an alpaca was purchased for $20,000, depreciated for two and a half years, or say 50 percent of its value, and then resold for $20,000, there would be a gain for tax purposes of $10,000. In other words, your adjusted cost basis is deducted from your sale price to determine gain or loss.

Once you’ve determined the amount of a gain, you must classify it as either ordinary income or capital gain. The sale of breeding stock qualifies for capital gains treatment (excepting that portion of the gain which is subject to depreciation recapture rules). Any alpacas held for resale, such as newborn crias that you do not intend to use in your breeding program, would be classified as inventory and produce ordinary income on sale.

This discussion of tax issues omits a number of rules that could impact your taxes. Tax preference items, alternate minimum taxes, employment taxes, installment sales, additional depreciation, and other concepts of importance were not discussed. Whether we like it or not, this is a complicated world we live in: it often requires the assistance of professional accounting and legal assistance.

In summary, the major tax advantages of alpaca ownership include the employment of depreciation, capital gains treatment, and if you are an active hands-on owner, the benefit of off-setting your ordinary income from other sources with the expenses from your ranching business. Wealth building by deferring taxes on the increased value of your herd is also a big plus.

So here is my personal opinion:

You see, because the most important source of revenue in the alpaca industry is the actual sale of livestock (particularly breeding females), and also because the 2nd most important revenue source (stud fees) are dependent upon the market price of alpaca livestock … the primary risk you take when you enter the alpaca industry is ‘market risk’. 

(Of course there ARE other risks besides market risk, … but the availability of very affordable alpaca livestock insurance eliminates many of these concerns.)

If you’re willing to embrace the alpaca lifestyle and work at it for five to ten years, most people should be able to grow their herds to a size which would be worth five hundred thousand dollars (and often more).  That’s because at today’s market prices, 35 – 40 registered alpacas are worth that much. 

So, as far as I can tell, the only truly significant risk we take when we decide to get into alpacas, is whether 35 to 40 alpacas will still be worth a half million dollars when we’re ready to get out. 

The good news is that the average alpaca costs between 10,000 – $20,000 now – the same price it cost during the introduction of the species in the U.S. 25 years ago. Although this market value is subject to fluctuation like any other market, the value has stayed nearly the same because demand has been keeping pace nicely with supply.  (The US herd is still pretty small.)

One of the reasons the Alpaca herd stays small is because the registry of imports is formally closed (here in the USA, we’re not allowed to bring in any more from outside the country) and because females can only have one “cria” (the term for an alpaca baby) each year (the gestation period is 11.5 months!) 

Breeders in the business for a decade or more will usually say they’ve seen the low-end prices for alpacas drop and the prices for the top animals increase. This is also an indication of the stability of the value in the market overall. (And a good reason to embrace the lifestyle fully if you’re going to do this, so that you really can learn how to develop high end animals.)

One of the first females we bought had a 4 month old female cria at side. I named her Coconut Crunch, CC for short. (See her 11 month picture above.) That was in August of 2004. Well, just this week, June 7, 2009, CC delivered her third baby girl! In addition to that, her first cria, Sedona, is pregnant and due in the fall. From that initial purchase of CC and her dam, our herd has grown by 6 (all females) with several more years of production ahead. We’re not ready to sell CC or her offspring yet … even though we’ve had offers from people to buy her.

These are some of my thoughts … what are yours?

But I really don’t think they’re much alike at all, and here’s why:

First, with Emus, the profit center was supposed to be the meat market (which never really materialized in the U.S.)

With Alpacas, there is NO meat industry, and no one is relying upon it to produce revenue in their business model. 

That’s a good thing for two reasons.

First and foremost … if you have to slaughter an animal to derive value from it, you have an inherent limitation in your
model.

Second, you’re going to get kind of emotionally attached to these animals … (they’re very sweet) … so it would be heartbreaking to sell them for slaughter.

Emus also produced valuable oil, but not really enough to make a real profit.

But the biggest difference between the alpaca and emu industry is that one female emu could have DOZENS of offspring every year, which grew the USA herd size too quickly to allow for stable market values.  There was no way that demand could keep up with supply.

(The rapid reproductive rate of emus also made it difficult for farmers to keep up with expenses and needed equipment – and people were confused about how large an omelet you’d get from one Emu egg.)

Alpacas have only one baby a year, so herds grow slowly unless you buy more alpacas. (That’s also why it takes a few years to start earning significant income, and that this is an industry suitable for those willing to put in five to ten years.)

Another reason that alpacas appear to be a much hardier investment than emus is that the fleece usually earns enough money to feed the herd, and is expected to become more marketable over time.  So there is inherent stability for the alpaca farmer.

Last, because the value of an alpaca is directly related to the quality of it’s bloodline, alpaca farms often have a need to purchase animals from each other, or at minimum to buy breeding services. This creates the need/possibility to improve the genetics of the offspring and generate another revenue stream..

Long story short, although there is, of course, market risk in any investment, most of the experts I speak to, feel the alpaca market would remain stable for the foreseeable future, as it has for the past 20+ years.  (This is not a certainty though … only a probability.)

I worked with a professional researcher who tested this theory. He asked an MBA in finance who also happened to be a successful alpaca rancher what he personally would do if he inherited a hundred thousand dollars tomorrow.  He was anticipating that he would hear that he would be putting half in some type of safe and reliable instrument like treasury notes, some in stocks, and perhaps 25 – 30% into his alpaca business.

But this rancher pleasantly surprised the researcher by emphatically stating (without hesitation, I might add) that the 100% would go into alpacas. That validated exactly how I feel about my investment.

Please give me your thoughts on this subject by completing the comments section below.

1. It’s not like winning the lottery. However, more like growing your investment exponentially and in the long term profit appears very likely, if you’re willing and able to fully embrace the lifestyle for 5 to 10 years. 

 2. Although there are five main “revenue streams” in the Alpaca industry (livestock sale, stud fees, boarding fees fiber sales, and product sales) … by far the majority of the income will come from sale of livestock. 

3. Because the income comes largely from livestock sale, you’ll need to reach a critical mass in your herd (about 20 -30 Alpacas) before you can generate a substantial income.

Prior to reaching this level, it’s usually not a good idea to sell too many offspring because it interferes with your ‘production capacity’.

(Generating income requires that you sell your females … and if you sell too many before your herd is large enough, you won’t be able to increase in size as fast by breeding)

4. There are a number of significant tax benefits and write offs, which vary from state to state. You’ll need to consult with a certified accountant to advise you in particular, however, the government usually provides incentives to make it easier to get started, as long as you treat your Alpacas as a BUSINESS. (See the Post: Let Uncle Sam Buy Your Alpacas For You)

5. Although there are a variety of ways to reach critical mass, how much you invest in a quantity of livestock to start with, and how avidly you engage in the lifestyle are the two most important factors.

Theoretically, it’s possible to buy your way to critical mass right off the bat … however, this might also overwhelm the inexperienced Alpaca investor.

6. You don’t necessarily have to have the land or the money in the bank to get started.  Options for boarding (“agisting”) and financing your initial Alpacas are available from most breeders.  (More on this in a future post.)

7. You can (and probably should) insure your Alpaca investment at an approximate cost of 3% of the value of your herd, per year. (At the time of this writing.)

8. Generating a 6 figure income each year is realistic if you’re willing to grow your herd to 35 to 40 Alpacas.  Some farms do a lot more than this, and 7 figures is not impossible. (Even in a down economy.)

9. Losing your initial investment is probably less common in the alpaca industry because proven females should multiply their values by producing 7 or more offspring over the course of their lifetime.

10. If you’re only in it for the money … you might be better off doing something else.  But if you love and passionately embrace the lifestyle, the money should follow.

This is just a quick summary on the “Bottom Line” return on alpaca investing. What are your thoughts? Please comment below.