Critical Mass - By Lenny Shulman

(Originally published in the July 3, 2010 issue of The Blood-Horse magazine. Feel free to share your own thoughts and opinions at the bottom of the column.

By Lenny Shulman

By Lenny ShulmanIn virtually every U.S. Presidential campaign the candidates seek to fire up voters by telling them the upcoming election is undoubtedly the most critically important one in history. It is a ploy, of course, to get people to the polls, as only one such election can be the most important.

It is not hyperbole, however, to state that the impending yearling selling season is one of the most crucial ever for Thoroughbred breeders, farm owners, stakeholders, and the dozens of ancillary businesses that supply products and services to the industry.

In the more than two years between conception and bringing a 2010 yearling to market, the financial world has changed drastically. Yearlings of 2008 through the present were bred on engorged stud fees, and when the stock market tanked in the midst of the 2008 Keeneland September sale, the game changed, and not for the better. Although that sale posted just modest losses in gross (15%) and average (10%), last year’s yearling selling season took the brunt of the collapse’s aftereffects, with average yearling prices dropping an additional 22% and gross revenue plunging by nearly one-third.

Banks, meanwhile, have cut off the flow of capital to borrowers and called in loans helping to fund Thoroughbred operations already out there. Horse and/or owner shortages have constricted racing dates in jurisdictions large and small, and political incompetence and indifference have, in major arenas such as New York and Kentucky, hindered racetracks and owners from recouping their investments.

Thoroughbred operations of all sizes have reached critical mass. The low-end and middle markets have dried up or moved to regional outposts as many mares have gone out of production or been moved to state programs where turning a profit is still a distinct possibility.

Even on the high end acute trouble persists. If you have done everything right and been highly intelligent about running your operation, said the owner of one major Kentucky breeding farm, you’ve still seen your revenue decline by one-third. Shares in outside stallions are worth half what they were a couple of years ago. One’s own stallions are bringing in at least 25% less on average because of reduced fees and fewer mares, and more liberal payment plans mean cash-flow crises are more likely. If you are encumbered by loans and have made some missteps, the situation is considerably uglier.

Although the stock market has stabilized in the last year and certain economic indicators point to a recovery, it has not to this point been a robust bounceback, and, besides, the rule of thumb is that when dealing with markets of non-essential commodities such as racehorses, any recovery is likely to lag one or two years behind the general economy.

Which brings us to the 2010 yearling selling season. There is no question about it being a buyer’s market when you compare prices with a few years ago. But are the buyers out there in sufficient numbers to pull breeders and stallion owners back from the brink?

“You just can’t know yet,” said Dan Pride, chief operating officer of Fasig-Tipton, whose July (Kentucky) and August (Saratoga) sales kick off the selling season. “We’re trying to blast the market with our ad campaign, and do target marketing to end-users.

“This is an important time for so many of our selling customers; this is where they realize the majority of their operating income. So it’s a responsibility we take very seriously.”

Substantial numbers at the Fasig-Tipton sales would no doubt be a welcome psychological and tangible boost for the industry. Yet the boutique nature of these auctions, given the fact high-quality stock is more likely to maintain its value than lesser-quality offerings, make them less a bellwether of the overall health of the horse business than the Keeneland September sale, which, at two-weeks long, covers all aspects of the market.

Geoffrey Russell, Keeneland’s director of sales, speaks often of the realization that the welfare of numerous families rides on the results of the September auction and impacts many of the decisions his team makes in the selection and placement of horses in the sale.

Many of those families today are operating on the edge. Which is why it is no exaggeration to say this selling season, for most people, is the most important one in quite some time. 

Lenny Shulman, Features Editor

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