Alpaca farming raises more than hair
By Julie Sturgeon • Bankrate.com

Pssst, how would you like to rub noses with your next investment?

Nearly 2,000 Americans have answered, "I do," opening their acreage to alpaca farming.

Alpacas are members of the camel family, and closely resemble their llama cousins. However, this gentle animal's bone structure makes it useless as a pack animal and, outside Peru, no one particularly wants to dine on its meat.

The five-foot mammal's value lies in its soft, luxurious fleece, used in everything from garments to teddy bears.

Most of those raising these exotic livestock resemble Chuck and Helen Stewart. She was a pediatrician, in Larkspur, Colorado; he served as her office manager.

When the Stewarts first glimpsed a shaggy alpaca on The Today Show, they saw it as a loveable pet. But at prices equaling a year's college tuition, this wasn't a puppy-sized purchase. Affordability lay in starting a breeding business.

His accountant, however, knew nothing about the exotic livestock industry. His attorney was a small-farm ostrich rancher who told tales of expensive investments that stuck their heads in buckets and died too stupid to lift their heads from the water.

His banker also admitted ignorance, but was willing to front the capital in exchange for everything Stewart owned as collateral.

"There are millions of pigs, cattle and horses. An alpaca sets apart because of the initial cost. People who go into this must first commit the funds, then make the money," says fellow farmer Ed Friedman, an ex-attorney and real estate developer who now divides his time between a 52-head alpaca farm and his position as an adjunct faculty member who teaches entrepreneurship at Penn State University.

"There's something innate in humans that insists there is a way to make big money fast," says Bill Staton, chairman of Staton Financial Advisers LLC in Charlotte, N.C., and host of a seminar titled Wealth Building Strategies That Work.

"I'm not saying it's a scheme -- somebody can make money at it. But it's like Michael Jordan and basketball. He can't explain why he's such a profound basketball player. When you get out of your area of expertise, it spells trouble."

"This is an investment. You don't make it with money to pay the mortgage," Stewart warns.

To buck odds that have sent country folk to their financial ruin, city investors need a solid business plan, five years' of capital and a responsible mentor.

Profit: The good news
Alpaca profits today lie in breeding. Investors who want a quick return buy a pregnant female for $20,000, then sell her baby for $10,000 to other newcomers to the industry.

Those building more slowly hold female babies until they, too, are pregnant and worth their initial purchase price. The return on investment ranges from Stewart's 50 percent annually to 10 percent for those unfortunates with scrubby stock.

Others purchase an alpaca, then pay someone boarding fees to raise it. This option, Friedman says, reaps the smallest return.

All this breeding is leading toward a fleece market -- but not for 20 to 40 years, Stewart estimates. As secretary of the Alpaca Owners and Breeders Association, he points to literature claiming ranchers sell their fleece to artisans for $2 to $4 an ounce. Fiber thickness counts also influence price: get it too coarse and the price starts to slide.

The real hurdle, alpaca farmers say, is that neither the United States nor Canada has a large mill that commercially processes alpaca fiber from hair to sweater. That leaves domestic demand to a small cottage industry.

Shared shearing times flood this tiny market, driving the price down. Some alpaca farmers work around this by spinning their own fibers, knitting the sweaters and marketing the apparel on the Internet.

Not for the faint-hearted
Alpaca breeding stock costs are dizzying. An average pregnant female costs $22,000, according to the AOBA. Some sell as low as $12,500; superior stock commands $40,000.

Males retail between $7,500 and $25,000, although the highest quality studs have sold for more than $100,000. Prudent farmers might assume they can save by shelling out $1,000 to $3,000 for stud fees, but alpacas are social mammals. Solo living stresses them out until they die.

Ostrich veterans don't blink at such antes. Their industry saw breeding stock go from $70,000 a pair to $2,500 in a few years. But Stewart claims the alpaca association has licked this deflation nightmare.

For one, it introduced an animal registry and closed it to further importation to protect U.S. herd growth. This approach sidesteps fraud, which also tainted ostrich pioneers, by listing blood type and DNA data to ensure top-notch breeding claims are exactly what they purport to be, Friedman points out.

Second, alpacas reproduce slowly.

Currently, North America harbors 30,000 alpacas, 18,000 of which are females. The portion of females younger than the 18-month-old breeding age brings the quantity of potential mamas to 14,000. They'll produce 50 percent males and 50 percent females, which can't reproduce until mid-2003.

"We're not looking at mass production here," Stewart adds.

Other ongoing costs include:

Land: You need five acres to support 20 alpacas. The good news: they create a communal dung pile, so sanitation efforts are concentrated.

Equipment: Stewart only needed a rake, shovel, water buckets and wheelbarrow, but he couldn't resist purchasing a truck, too. Most farmers need a barn and fencing -- but the upgrade temptation meant Friedman sunk $165,000 into his structures. And even the stingiest investor pays for the convenience of lead ropes, harnesses and toenail clippers. AOBA estimates $12,500 in startup costs here.

Feed: Alpacas eat grass or hay to the tune of one bale per adult every eight days. A special alpaca feed containing vitamins, minerals and protein pellets runs $300 per year per animal.

Veterinary care: Friedman's bills set him back $25 per alpaca per month, including rabies vaccinations and deworming treatments. Stewart, on the other hand, budgets $35 per animal annually -- a figure that includes special requests to help with birthing complications. Unfortunately, alpaca anatomy isn't a required course in this country, so many farmers find the local vet is almost as ignorant as they. Speaking of expertise, shearing can require a professional touch from South American practitioners, if you can find one.

Insurance: Premiums that cover full mortality cost between 1 percent and 3.3 percent of an alpaca's value, paid up front annually.

Marketing: Set aside 8 percent to 10 percent of your budget for marketing purposes. Without brochures, Internet sites and hosted visits, you won't sell the livestock.

Education: AOBA dues run $125 annually, annual conference fees and travel costs can bite your wallet anywhere from $150 to $2,000. Attendance, however, increases the knowledge you need to survive the introductory stage.

Friedman estimates the average alpaca investor can break into the field for between $80,000 and $100,000. The risks include the fact that the animals can injure themselves or die unexpectedly, and a defect plummets a breeder's price value.

Stewart was forced to neuter one male and sell it as a fiber animal for $1,000.

"Without this fault, he was a $30,000 stud," he sighs.

Taking care of the taxes
Never invest in alpacas solely as a tax shelter, Friedman advises. But certainly expect to use this business avenue to write off expenses.

Farm losses offset income from other areas. An $180,000 loss in 2000 translated into a $65,000 tax shelter for Friedman.

Alpaca farmers also may appreciate the animals over five years, and the breeding stock enjoys a lower 20 percent long-term capital gains treatment.

Or, under section 179, you may write off newly acquired equipment that you put to use in 2001 up to $24,000. The truly savvy trade alpacas with a colleague without any tax implications, similar to a real estate 1031 exchange.

"Helen and I have been extremely successful," Stewart admits. "Part of it is luck, and the other part is we treat it as a business that takes work. You don't get rich quick on a legitimate business enterprise.

"You just have more fun with this one."

-- Posted: Sept. 5, 2001