LIVESTOCK INVESTMENTS...
financial justification for raising suri alpaca
by Jack W. Donaldson
The beginning of most suri alpaca operations starts from the desire to acquire these wonderful animals and the vision of a very desirable lifestyle that appears to come with them. Sometimes the desire and vision is so powerful that the initial investment comes before the definition of purpose for the investment- the car before the horse syndrome.
Within moments of writing the first check, there comes the realization that you need to justify your actions. Not only are friends and relatives questioning your sanity, there's also this voice in your own mind demanding validation that you have indeed made a rational decision. Some people take longer than others to start the planning phase. I don't believe the start process has anything to do with the IQ but rather, how well you stayed within the lines when coloring as a child or even coloring as an adult. In other words, planning a business takes discipline.
The desire to be part of the wonderful, rare and beautiful world of the suri alpaca can be a great lifestyle and very rewarding business.
Once the need comes for rational planning, there comes the realization that the ultimate product of your revenue could be one of several options. Many of these options are dictated by one's personal financial position. Options like: 1) Hobby with unlimited funds; 2) Hobby with a break-even goal: 3) Desire to raise suri alpacas to sell fiber and make a profit: 4)Establish a profitable business with unlimited funds .5) Establish a profitable business with limited funds.
This article will attempt to demonstrate that a very profitable business can be established with limited funding. Once that has been established, it becomes clear that option 3 can work in the U>S> without adding additional value from processing into a product needs study and will not be further discussed in this article.
Let's start with some assumptions:
1. Purchase 5 suri alpacas as a starter Package.
2. Package will consist of the following:
2 bred females (1 white, 1 fawn)
2 weanling females (1 white, 1 bay black)
1 show/herd sire quality yearling male
3. We already have property (at least a couple acres fenced) and a small barn.
4. We need to borrow 45% of the funds to get started.
5. We can depreciate our suri alpacas over 5 years.
Cost of our Suri Alpaca Investment:
Bred White Female Suri $22,500
Bred Fawn Female Suri $25,000
Weanling White Female Suri $15,000
Weanling Bay-Black Female Suri $25,000
Yearling Show Winning Colored Male $22,500
Total $110,000
Package Discount (10%) $11,000
Investment in Suri Alpacas $99,00
Based on our investment, let's prepare a three year projection
Assumptions for the three-year projection:
$99,000 spent on alpacas
$11,000 spent on equipment including scales, internal fencing for barn, medical supplies, ect.
Have $15,000 available for operating funds.
The total of the above in $125,000, and you have cash available of 70,000.
Borrow $55,000 from bank at 9.50% (prime +1) over 5 years.
Females are first bred at 15 month and 90% of the eligible females produce a cria.
50% of offspring are males and 50% are females.
On average, a young female suri sells for $15,000, and, on average, a young male suri sells for $5,000.
Only purchased alpaca are insured at 3.25%.
Assume federal and state tax rate of 35%.
Assume 5-year depreciation combined with section 179 allowance.
Income and Expense Projections (also Federal and State Return Information)
INCOME
1st year 2nd year 3rd year
Sale of Alpacas $0 $20,000 $20,000
Breeding Fees 0 2,500 7,500
Fiber Sales 250 350 450
Total Income $250 $22,850 $27,950
EXPENSES
1st year 2nd year 3rd year
Insurance $3,250 $3,250 $3,250
Shearing 125 175 225
Travel and Meals 250 300 350
Seminars & Conv 300 450 600
Veterinary 400 500 500
Telephone 600 500 500
Hay and Feed 300 350 400
Depreciation 32,000 20,400 14,250
Marketing 500 2,000 4,000
Interest 5,100 4,125 3,150
Marketing 500 2,000 4,000
Total Expenses $42,825 $32,050 $27,325
Net Income -$42,575 -$9,200 $625
Starting with a $42,575 first year tax loss generated primarily form depreciation note that in the third year we have a small tax profit of $625. Since depreciation is not a cash outlay item, but the principal payment on our loan and refunds from the government is, let's take a look at our cash flow each year.
CASH FLOW CALCULATIONS
1st year 2nd year 3rd year
Beginning Cash $15,000 $10,675 $15,450
Principal Loan Pmt. 8,650 9,625 10,600
Tax Refund (35%) 14,900 3,200 -212
Net Cash Flow* (-4,325) 4,775 **4,063
Ending Cash 10,675 15,450 19,513
* Net cash Flow is net income plus depreciation, plus tax refunds and less principal loan payments.
** Tax Shelter of depreciation is running out, time to buy more alpacas.
Starting with our $15,00 cash, we end the first year at $10,675. This amount is computed as follows:
(42,575) Loss
32,00 Add Non Cash Items Depreciation
(8,650) Principal Part of loan Payment
14,900 Add Tax refund or Tax Reduction
(4,325) First Year Cash Reduction
Next we should look at our inventory of suris
Alpaca Inventory
1st year 2nd year 3rd year
Beginning of Year 5 7 7
Births (1m/1f) (1m/1f)2 (2m/2f)2
Sales 0 (1m/1f)2 (1m/1f)2
End of Year 7 7 (3m/6f)9
Starting with 5 suris, by the end of year 3 we have 9: that is after a sale of 2 each in both the second and third years. Now putting the pieces together, let's determine how much wealth or value we have accumulated as a result of our venture.
VALUE CALCULATIONS
1st year 2nd year 3rd year
Alpaca value at end of year $119,000 144,000, 164,000
Accumulated cash 10,675 15,450, 19,513
Original equipment 11,000 8,800 6,600
Balance due on loan 46,350 36,725 26,125
Equity in project 94,3235 131,525 163,988
Investment 70,000 94,325 131,525
Return 35% 39% 25%
Starting with our original cash investment of $70,000, note that after adding up our cash, equipment after depreciation, on loan balance and our inventory of alpacas, we now have a total value of $94,325 at the end of the first year: this computes to a 35% rate of return. In the second year, we generated a 39% return, and the third year a 25% return.
Right away, the question should come to mind-why the reduced return in the third year? The answer is that year now have a partner -Uncle Sam. You are so successful that he is no longer giving you tax refunds or tax reductions. Instead, you have started to pay him.
The solution to the reduced return is as follows. Now that you have been in business for 3 years and have proven you area successful breeder, it's time to visit your local banker. Show him the results of your success and borrow money to expand your business.
The desire to own the wonderful, rare and beautiful suri alpaca can be a great lifestyle and a very rewarding business. With less than 1% of the world population of alpaca declining suri and declining yearly, the potential is unlimited for the limited number of dedicated suri breed breeders in the United States.
Jack Donaldson is a former president of a large regional bank and also a CPA. He served on the AOBA. Board as Treasurer from June 1996-2000. He is very involved with the Suri network and serves on its Marketing Committee. He is CO-owner, with his wife Miriam, of Alpaca Jack's (419)423-3890; alpacajack@aol.com
SUPERSURIS Alpaca Ranch
Nancy & Dick Walker
16219 N. Day-Mt. Spokane Rd.,
Mead, WA 99021
Toll Free (877) 803-0558
(509) 238-3191
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