Tuesday, October 5, 2010

The Economics of the Alpaca Industry

This will probably be viewed as a somewhat cynical and definitely a controversial view of the alpaca industry, but really it is just an economic viewpoint on a business opportunity (and I have studied economics).  As someone who has been raising and breeding alpacas for 8 years, I have stood back and made some observations that are startling to say the least. 

I feel that most alpaca owners can fall into 3 categories in regards to the alpaca "business":
  1. Those that treat this like a business and try to make money (and many do)
  2. Those that treat this like expensive pets and "enjoy the lifestyle" sometimes to the detriment of their bank account
  3. Those that do this only as a tax shelter (these are typically people who have purchased their alpacas more than 5 years ago)
    Of course this is not black and white, but for the sake of the article and for the sake of argument we will be only discussing the first 2  categories, because folks who use something strictly for a tax shelter either want to come out to a net sum of zero or lose a little money (in my experience). 

    I think in order to get a clear picture, we need to be on the same page so let's talk about some simple economic principles to became familiar with.  I will try to keep it simple and short because while economics thrills me, I know most people find it pretty dry and dull. 

    Supply and Demand -  an economic model of price determination in a free market. Quite simply stated: in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price), resulting in an economic equilibrium of price and quantity. 
    • If demand increases and supply remains the same then price per good increases
    • If demand decreases and supply remains the same then price per good decreases 
    • If supply increases and demand remains the same then price per good decreases
    • If supply decreases and demand remains the same then price per good increases 
    For most of last year (2009) - I believe the alpaca breeding stock industry saw a decrease in demand and an increase in supply.  Which is a combo of bullet points 2 and 3 above,  which inevitably had prices decrease or in a free market that worked efficiently - they SHOULD have decreased.  

    Category 1 -
    Now let's talk about people from Category 1 above "Those that treat this like a business and try to make money" .   The people that fall into this category, (of which I am one) during the economic recession in 2008 - 2009  either intuitively or purposefully decided to reduce their prices on their breeding stock in order to continue to sell alpacas.  Now don't get these folks confused with people who ran scared and sold out entire herds at any cost, or folks who HAD to sell due to job losses etc, or would have had serious issues.  I am speaking of people who made a conscious decision to lower prices. 

    I significantly reduced prices and have sold over 35 animals so far in 2010.  While more folks decided to finance animals and of course prices where down from years ago (as supply and demand would dictate), we were able to do well with our sales since we have approx 40 cria born each year.  We also decided to ask most of our long term boarders to leave who had more than 10 animals each.  Now while this sounds counter-intuitive, board does not really make a farm money when one adds in all the extra work and aggravation and phone calls etc. that the host farm has to include in a day to day operation.  This actually helped to cut opportunity costs (is the cost related to the next-best choice available to someone who has picked between several mutually exclusive choices) because it freed up my employees and myself to be able to do more value added work which would add more money to the bottom line than board fees.

    Now of course in order to make the choice to ask boarders to leave, you need to be able to know how much each animal on your farm costs to care for.  I calculate my costs on a rolling quarter basis, so I know at any time of year what a single animal costs to house, feed, medicate etc.  Of course this is an average across the herd, I do not know whether Fluffy or Muffy actually eats more.   However,  I do know who required more medical care and what each individual animal makes in terms of breeding fees, cria production and sales and fiber sales.  (Tracking fiber costs and sales per animal will be in my new book). 

    Once the aggravation factor increased, the money we were gleaning from board no longer made sense and it was an easy decision to move these folks from our farm.  We had approx 40 animals leave this past summer (2010), with another 35 or so sold,  we greatly reduced our workload,  reduced crowding and made herd health much easier.  Now be prepared, when you ask people to leave your farm, regardless of how nice or how much notice you give, they will be upset, take it personally and you will most likely sever a business relationship.  People who board with you tend to think that they are your best friends and do not realize the work, worry and responsibility  it is to care for animals you do not own.  Boarders can also take advantage (but that is a topic for another blog post - which will be up in the next day or so). 

    Most breeders who have been successful in the economic downturn have also shifted focus to more local advertising rather than national advertising.  Local advertising through public outreach, events and other forms of inexpensive advertising such as flyers, very local newspaper ads etc is reaching a broader audience.   New people and people who were not aware of alpacas as an investment, an agricultural crop or 4H performance animals are being introduced to a whole new world..  Internet advertising and social networking can also be a powerful and often free advertising venue.   (Please read my Facebook Article here.  There can be many pitfalls of social media on line as people "read into" comments as there is often not a "tone" like in person as well as people would say things on line to a faceless computer screen that they may not say to your face - so beware and careful in how you use this powerful media.  It could put you at the other end of a slander suit. )   We used to advertise full page ads in American Livestock each quarter.  This cost was $3,000 per year and over the 4 years we did it, I could not trace back a single sale to this magazine.  Because of this it was also an easy choice to cut this out of the budget and use that money where sales were coming from.  Again, you can only make these choices if you know where your sales are coming from, so you need to query your customers. 

    By lowering prices many more folks who once were unable to enter into the alpaca industry due to the high entry costs have been able to purchase, thus allowing more breeders in the mix,  rather than simply selling to each other.  Of course with this has come some negative consequences.  I have seen and heard of more incidents of  legal disputes, repos and failure to make payments on time.  I have also seen new folks disappointed in their purchase of a boy for $250 thinking that he was going to be the next HUGE herdsire only to walk from the show ring.  While there can be boys that are "diamonds in the rough" for little money - sometimes they really are only worth "fiber boy" status.  I am honest when I sell boys inexpensively and tell folks that "this boy should NOT be a herdsire" and point out why.  Or, this boy while selling for little money "has potential", but I cannot use him in my program for one reason or another. 

    Category 2 -
    Breeders from the Category 2 above "Those that treat this like expensive pets and "enjoy the lifestyle" sometimes to the detriment of their bank account"

    This category is made up of a multitude of people.  
    • Don't want to sell at a lower price because they think it will "hurt the industry"
    • Don't want to sell at a lower price because they have too much invested
    • Don't want to sell at a lower price because they think the market will rebound to incredulous prices of yesteryear
    • Don't want to sell at a lower price because they can afford to keep their animals and don't care if they sell or not 
    • Seriously believe that their animals are worth the prices of years gone by 
    I can totally respect if people chose not to lower their prices and are OK with not selling any animals.  The people that really annoy me are those breeders who complain that they have not made a sale in years, claim they are losing money everyday and complain that the industry is a mess, broken, and they were lied to either by AOBA or other breeders.   My comments back to those folks are, the housing market is a mess, houses are worth less than purchased for if purchased in the last several years, stock market is down, construction is down etc etc.  I think almost every sector of the economy has been hit and some hit very hard.  NOW there is a bright spot in the economy and that is the craft sector.  My yarn and fiber sales have increased dramatically since 2008.  I cannot keep up with local demand for my exclusive products!! Now of course, I have shifted much of my focus to fiber endeavors.  We of course still breed, sell breedings to our herdsires, promote our breeding programs and show at at least 7 halter shows a year, I shifted my business model to have the majority of our income come from fiber and fiber based activities and the breeding end of the business is a great "topper" to that income.  This has shifted my paradigm significantly since my start in 2002.

    Other Insights and Observations - 
    Some disturbing, some eye opening and some just need to be said !!

    The majority of breeders have little to no business experience and little to no livestock experience.  I see many folks (women especially) with empty nest syndrome who cannot part with animals they raise.  Again, that is all well and good IF they do NOT complain about the industry, the market etc.   I am tired of hearing people say they cannot make money with alpacas.

    The "motherly", "mother earth",  "tree hugging" breeder.  These folks want to dazzle you with the "beauty of the alpaca" and the "peaceful lifestyle" and how wonderful these creatures are, but yet they never get into facts and figures, have very little to offer in terms of fiber aspects of the business and simply want to Kumbayah their way into your mind and wallet.   While I do love my animals and do enjoy them and think they are wonderful, I have a sound business plan.  I use all my fiber and make money doing so.   If you are looking for a tree hugging, Kumbayah singing, kiss and hug an alpaca farm, move on because you will not find it at Alma Park.  If you want to know how to make money, how to show, how to keep them healthy, do fecals, skirt and sort your fleece, make good yarn, halter training and on and on - then you have come to the right place.   So beware of the folks who want to be your best friend and only talk of "cuteness".  I don't blow smoke and I don't candy coat things.  I offer  a real business opportunity for those that want to work.  This is not a get rich quick scheme - it takes work and persistence to make this a sound business!

    The jealous and lazy- these folks I have no time for!!  I have helped countless people with fiber and herd health, yet I still get off-handed comments "well, it is great you are doing well, but what about me".  I have offered courses, free seminars and on and on, but people simply are either lazy or too jealous to see straight.  I have actually had people get mad at me when I refused to skirt their fiber for free!!  Are you serious? I clip over 1,000 pounds a year to skirt, sort and move into the pipeline, but I am supposed to do yours for free???

    I am currently finishing up my book on how to make yarn, aimed at the breeder community and once this comes out, I will no longer be offering advice for free - no more free seminars at shows about fiber, no more free seminars on my farm about fiber.  Buying my book or purchasing an animal from our farm will be the only way to get this info.  Sorry the stupid few have ruined it for the many.  I am tired of people bashing me because I am successful and have an opinion.

    The meat market - a well known and large farm publically announced recently that they have been "(harvesting) them for your freezer as we do".  I chose to raise alpacas rather than other forms of livestock primarily because of the fiber and the fact that there is no terminal market.  I will continue to conduct my business in the same aim I started out and that is that I will not allow any animal I brought into this world wind up in a poor situation or to go as meat.  I do not agree with this farm's philosophy . . .you make your own decisions.  I belive that the ONE and ONLY key to reduce the need for rescues AND/OR a meat market is to create a STRONG FIBER industry in North America!!  



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