Shedding the Old - by Dan Liebman

Blood-Horse Staff — Tue, 10 Feb 2009 14:49:00 GMT

“It was the best of times; it was the worst of times…”

So goes the oft-quoted line penned by Charles Dickens in A Tale of Two Cities, his 1859 novel that describes the days of the French Revolution and the proletariat’s fight against the aristocracy.

The Thoroughbred breeding industry finds itself facing both the best and worst of times, and it has nothing to do with the proletariat and aristocracy. It has to do with the world economy.

“The problem is not the horse industry,” a breeder said emphatically one recent morning at the Keeneland track kitchen. “The problem is the overall economy.”

While the global economy is a mess, there are problems in the Thoroughbred industry, many of which are magnified due to the current economic climate. It is how breeders react that will set the course for the future.

Adverse economic conditions are forcing new ways of thinking about old ways of doing things. Those who re-create, innovate, accommodate, differentiate, and recalibrate not only will survive, but are poised to succeed when the economy turns around. Those that do not may not be in business much longer.

For years Thoroughbred breeders have been enjoying the best of times; now they must navigate through the worst of times. Tough times force tough decisions, but they also force creative thinking.

It was easy when sales were strong, but recent auctions suggest those days are over for the time being. Important decisions made today affect sales for years to come.

As breeding sheds throughout the Northern Hemisphere open this week, stallion managers are offering various incentives to induce mare owners to breed to a particular horse. Besides the monetary discounts, more farms are offering the opportunity to pay stud fees from sale proceeds, allowing commercial breeders a longer period of time to pay off an obligation.

One farm this year, Walmac, is offering a new twist, extending the opportunity for a mare owner at any time within 30 days of foaling to convert the contract to a foal share arrangement. By agreeing to let a breeder decide later about a foal share, the farm is showing faith in its stallions’ foals while allowing the mare owner a chance to assess his cash flow up to 10 months down the road. It is this type of creative thinking that may help keep the seesaw level during the best of times and worst of times.

With foaling season in full swing, breeders everywhere must reassess their broodmare bands, deciding which mares to breed back and which mares to cull or simply give a year off. If every breeder decided not to send 20% of his broodmares to the breeding shed this year, the size of the foal crop and the pendulum of supply and demand would swing back in the right direction come 2010 and 2011.

When an auto manufacturer wants to slow production, it is easy. Turn off the assembly lines, send workers home, and produce 20% fewer cars. For a breeder it is not so easy. Mares bred in 2008 are producing foals in 2009; there was no way to shut down the assembly line. But there certainly is a way to shut it down for 2010.

Breeders will also be looking to sale companies for help, and on Feb. 6 in Australia, Magic Millions announced a new commission structure for its weanling and broodmare sale: prices up to and including $100,000 pay 6%; hammer prices between $100,001 and $150,000 are charged 4%; and sales of $150,001 and up pay 2%.

From this perspective, the structure is creative but seems upside down. Why should the seller of a $100,000 weanling pay $6,000 in commission while the seller of a $200,000 weanling pays $4,000? Wouldn’t it benefit small breeders more to give them a commission cut on lower-priced foals and mares?

Any savings a small breeder can bank today will help him navigate through the worst of times.

Two Market - by Dan Liebman

Blood-Horse Staff — Tue, 20 Jan 2009 14:39:00 GMT

The Keeneland January horses of all ages sale is a barometer of, well, nothing. Most years, that is.

Unless there is a major dispersal or unless the odd high-priced broodmare or two end up in the January sale rather than in the larger and more prestigious November auction, January normally contains a hodgepodge of mostly middle- and lower-end breeding stock, and what the industry refers to as “short yearlings.”

In fact, the 2009 edition, played out Jan. 12-17, contained exactly that. So, with a less than stellar catalog, and by coming just two months after a lackluster November sale, no one expected much.

Still, the numbers speak volumes: gross down 53.4%; average off 48%; and a decrease of 44.1% in the median.

But it is not just the stark reality of the numbers. There is meaning behind them. The figures are not only a reflection of the stock that was offered, but rather an ever-present reminder of the bleak economy and how it is affecting the Thoroughbred industry.

Many people are simply not spending money. Whether it be on shoes, televisions, houses, or horses, consumers are pulling back.

The horses in the January sale that had everything going for them still brought “fair” prices. But more than ever, those that had holes in them had few interested buyers. As in November, many breeders that absolutely didn’t have to sell simply withdrew their horses from the sale, while others, that didn’t have to, did sell, obviously intent on reducing the size of their broodmare band or of dispensing with the cost, and risk, of raising a yearling until the summer or fall.

The stock, and the money paid for it at the January sale, are not usually indicators of how things will go at the winter and spring sales of 2-year-olds in training. But the mood of those in the horse business, clearly on display at Keeneland, was as chilly and dreary as the weather in Central Kentucky during the first major Thoroughbred auction of the new year.

When pinhookers were buying yearlings last year to resell as juveniles this year, the market was still fairly stable. A great deal has happened in the past six months. So, the question is not if the 2-year-old sales will be down, but by how much?

Back in 2003, the five major sales of 2-year-olds in training—Ocala Breeders’ Sale Co. February and March, Fasig-Tipton February, Barretts March, and Keeneland April—grossed $93.67 million. Just three years later that figure had jumped 48.4% to nearly $139 million. Of course, $16 million of that $139 million was for one horse, the disappointing The Green Monkey. However, without the highest-priced horse ever sold at public auction in the equation, the gross still increased 31.3%.

Last year the five auctions grossed $111.8 million, producing a hefty average of $194,782 for the 574 horses sold, and more importantly, a record median of $157,500.

The past five years the gross at the five sales has exceeded $100 million, so it would be easy to say those who did well in recent years will not have all their profits erased in the expected down market of 2009. However, pinhooking is a game of constantly refilling the tank, using profits for two purposes—to pay down debt from the past and to invest in stock for the future.

The 2-year-old market should not be a reflection, however, of the breeding stock sales but rather of the yearling sales. The biggest yearling auction, Keeneland September, was down 14.8% in gross. Ask any 2-year-old consignor right now if he would be happy with the gross of these five auctions being down 14.8%, and the answer is he would not be happy, but ecstatic. A drop of 50%, as in November and January, would have long-term effects on the churn of money through the auction houses.

Juveniles purchased at auction are ready to take to the track, and racing, after all, is what this is all about. Their prices should reflect their ability for a quicker return on investment.

What's Going On Here : economy

Shedding the Old - by Dan Liebman

Two Market - by Dan Liebman