Investing In Alpacas

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 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 ten pounds of fleece a year. A North American fiber co-op, endorsed by the Alpaca Owners and Breeders Association (AOBA), provides a commercial outlet for all breeders.

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 between two and three years of age. The females produce one baby per year during a reproductive life of 15-20 years.

The factors which influence individual alpaca prices include color, conformation, fleece quality and quantity, age, and sex. Females sell for more money on average than males, but herdsire quality males demand 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. Correct, well-conformed alpacas sell for higher prices. Fleece density, uniformity, character and fineness also affect the animal’s price.

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. The financial analysis found below incorporates animal prices that a buyer can expect to pay for good quality, sound breeding stock. Alpacas are much like diamonds. The market pays premium for flawless examples of the breed.

"Alpaca Compounding"
A major investment benefit of owning alpacas is based on 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. 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 "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.

The following graph illustrates how a herd might grow in size over a ten-year period, assuming you begin with five pregnant females and two males. The herd growth depicted represents alpaca compounding at work. The initial herd grows to 126 animals, assuming an 80% reproduction rate and a 50%male/50% female birth ratio. Not many investments appreciate at the same rate.

It should be noted that this graph, while clearly illustrating the principle of "Alpaca compounding" does not depict the average owners’ approach to alpaca ownership. 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.

Capital Requirements
Many breeders start investing in alpacas by purchasing several females and one male. Others wait to purchase a quality breeding male. Prices can vary substantially depending on color, conformation, fleece quality, fleece quantity, age and sex.

A small barn or shelter, built specially to house 15 to 20 alpacas might cost about $10,000 to $l5,000 if you contract for its construction. 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 another consideration at a cost of 3-3.5% of the value of the animals. A year’s supply of hay and grain/chow will be required based on your region’s seasonal grazing and the amount of pasture you have.

If a person were to begin raising alpacas at his or her own ranch, a typical start-up budget might look like this: Acquisition of one pregnant female and one young female $40,000
Insurance, one year $ 1,300
Equipment $ 500
Small barn and fences $12,000
One year’s feed $ 300
Veterinarian and miscellaneous reserve $ 900

TOTAL $55,000
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, would still make the important decisions about care, breeding, sales, etc.

This article focuses 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 using professional support if necessary. Expenditures of funds listed in this and other articles on this website warrant a full assessment of risks and the buyer needs to establish a comfort level that this is the right investment 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 listed 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 farm 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.

This analysis is easily adapted to any size herd, whatever your financial situation and lifestyle may support. Many new buyers start with a breeding pair or with 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 farm to participate.

Two different financial analyses illustrate this point. The first analysis reflects a program designed around selling all offspring to provide the shortest payback period to recover the initial outlay. The second analysis blends the selling of offspring with an element of herd growth. Both approaches have been utilized successfully within the industry. You can examine each approach and determine which scenario is most appropriate for your situation.

Major Assumptions of Both Scenarios:
  • The sale price of a female offspring (of breeding age) you raise is equal to the original cost per female in your initial herd. Younger offspring that are not of breeding age sell for less than mature animals. In this analysis, five pregnant females were purchased for $22,500 each. There are two herdsire quality males included in your initial purchase at $15,000. The sale prices for the males you produce were assumed to average $5,000 each. This allows for the fact that all males produced and sold would not be of herdsire quality.
  • You insure the herd for full mortality. Smaller herds are often fully insured against all risk, with no deductible, for about 3.25 percent of value.
  • It is assumed that you would have $12,500 in start-up costs for such things as barns, fences and equipment.
These improvements should also add value to your real estate and could be depreciated for tax purposes. Financial Observations
Flat Herdsize scenario
  • The average annual before-tax cashflow return on the original investment is 26% (27% in years 2-10). This is an impressive return, but remember to consider all the hard work your family puts into nurturing this investment, although most alpaca breeders delight in the fact that they are being paid so well to live the lifestyle of their choice.
  • The payback period, based on before-tax cashflow, is slightly over 4 years, with the original herd still intact.
Growth Herd scenario
  • Cashflow return %'s are fixed at 27% in the Flat Herdsize scenario. The cashflow return %'s in the Growth Herd scenario increase to 64% by year 10.
  • The 10-year cumulative cash flow is $93,000 higher than the flat herdsize scenario. Cash flows are lower in years 1-3 and higher in years 4-10. The payback period, based on before-tax cashflow, is 5 years, which is one year longer than the Flat Herd scenario. This is a result of foregoing short-term sales in favor of putting additional females in production.
  • 8 breeding females have been added to the herd, a value of $180,000 at the end of year 10, which is in addition to the overall cash flow benefit as compared to the Flat herdsize scenario.
  • Growing the herdsize is a tax-deferred method of wealth building.
Both Scenarios
  • There are opportunities to increase profits by boarding animals ($600 to $1,200 per animal per year depending on geographic area), or by standing a superior male at stud ($1,000 to $3,000 per stud service). Your willingness to board could be a huge marketing advantage as many prospective customers do not have the facilities in place for animal care.
  • 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 farming business. See Tax Consequences of Owning Alpacas section of this brochure.
  • The financial return using the agisted approach, should you elect to board your animals, is also very good, not often matched by other investments. There are breeders who would be happy to discuss agisting alpacas on behalf of prospective owners.
  • Quality, color, sex 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.

Alpaca Price Sensitivity
It is always wise to consider both the upside and the downside of any potential investment. It is important to feel comfortable with a range of possible financial returns should your actual experience differ from your assumptions.

Adjusting the model to make a one-time change of price by 10% in years 2-10, we find that the return percentages change by approximately 3% each year for every 10% price change in sales prices. In other words, your average annual return will be 23% should there be a 10% price decline or 29% should there be a 10% price increase. This indicates that it would take a severe price erosion to seriously jeopardize your initial investment.

For the reasons delineated in the Supply and Demand article, it is felt that long-term price stability is likely. A gradual supply increase due to natural restrictions coupled with a bright demand future would suggest that the assumptions utilized in the analysis are achievable. Keep in mind that the assumptions are not theoretical; they are drawn from actual current experience from farms across the country.