Breeders Adapt to New Market Realities

Oct 7, 2011

When the final hammer went down at Keeneland's September yearling sale, almost 3,000 horses had sold, 500 fewer than last year.  However, they sold for over $233-million, which represents an increase of almost 13%.  Plus, the average value of each horse was up 18%. "I've farmed 45 years. We raise tobacco and horse operation. We grow our own hay, our own bedding. We board horses and my brother and I have horses together. We're farmers that love horses,” said horse breeder Frank Penn.

Penn’s operation is relatively small, but he throughout the two-week Keeneland September Yearling Auction, the largest Thoroughbred sale in the world.

"You can't be a pessimist and be in this business, you just can't do it. Everybody walking through here believes they can buy the next one. And the reason they think they can do that…my theory on that is horses can't read. They have no idea who their mother and daddy is or their sister or their brother or whatever so it equalizes the market out. A lot of good horses have been bought for very modest prices and a lot of extremely high priced horses just didn't pan out," said Penn.

Despite its celebrity, the horse industry adheres to most of the economic rules that drive any business. Horse farmers must earn a decent return on their investments.  

On average, bringing a thoroughbred to market costs between $12-15,000 a year.  The investment can go higher if veterinary bills mount up. Mark Taylor, who’s vice president of public sales for his family's Taylor Made Sales Agency, adds it’s also an investment of time.

"With mares you have an eleven month gestation period, so you have all that time caring for the mare. And then the foal is born and the foal is about 18 months old when it's sold so…it's a two and a half year process to get that baby to market at the September sale," said Taylor.

Making such a huge investment so far in advance is tricky. Fashions in horses change and so do economic times. Another big change recently has been that banks, reeling from their own crisis, have tightened their lending to horse owners.

All of these risks have changed the market.  Given the high cost, many cheaper horses simply weren't bred. The Jockey Club reports the supply is down.  More than 23,000 foals were born this year…as compared to just over 27,000 last year.  Besides cutting supply, Taylor says, the way Thoroughbreds are marketed has also changed.

"Used to be you get your horse, you pull it out of the field, you get it where it's trained to lead a little bit, you brush the mane and tail off, trim its feet and take it over to the sale and see what people will give you for it," said Taylor.

But today, with tens of thousands of dollars invested in every horse, the entire process is more sophisticated. Consignors like Taylor Made who sell horses for owners, spend months grooming, exercising and schooling yearlings so they look their best when they walk into the show ring.

And they don't wait until potential buyers show up at a Keeneland auction. In the early years, hand written notes were sent to potential buyers.  With advent of technology, Taylor says that personal touch has become even more sophisticated…

"We got a really large database of about 13,000 contacts around the world that we segment several times a year. We go back through and do a market analysis of what types of horses they buy and try to match up the horses we're selling this year to similar ones that they've bought in the past," said Taylor. 

Keeneland also works hard to attract buyers from around the world. Buyers from Japan and the Arab states have been customers for years. But there are always new markets.

"We will send two members of our sales team, Will Mayer and Chauncey Morris, to India after the sale to recruit buyers. Russia has been a player for us about five years. We sponsor a race over there, Rogers Beasley and Chauncey Morris go over there at least once a year and watch our horses win races. Nothing helps our sales more than the success of our graduates," said Geoffrey Russell, who directs sales at Keeneland.

But yearlings have never raced, so, hoping to predict success at the track, buyers look at how the horse is built and its breeding. In Keeneland’s sales catalogue, there's a page for each yearling with a family tree going back three generations, including information about the family’s racing and breeding history.

A mare produces only one foal a year but, during the same time period, top sires can be bred 100 or more times. Stud fees…the fee charged to breed a stallion to a mare, are an important source of income for stallion owners and of cost for mare owners.  The cost varies widely, depending on the performance at the track of a sire's offspring, the health of the racing business and the overall economy.

Jim Squires, a former newspaper editor in Chicago and author, now owns Two Bucks Farm where he bred Kentucky Derby winner Monarchos.

"The stud fee ranges have dropped dramatically. We used to have $300,000 stud fees, now we have $100,000 stud fees."  "That's the upper end now?" "Yeah, pretty much, $100, $150, I think Dynaformer stands for $150. The days of the $300,000 stud fees are gone forever," said Squires.

In this complex market, declining stud fees and a smaller supply of horses can actually be good news.

"What has gone up is the number of horses that get sold, period. That's because the stud fees are going down and you come here with less need to make a profit, the threshold is lower….the unsold horses rate has gone down, which is good," said Squires.

Keeneland's Russell explains that's been good for everyone this year.

“The money seems to be spread more evenly this year, too. Everybody's getting a piece of this pie and that's important," said Russell.

But these horses, after all, are bred to race and that's what keeps people from all over the world coming back to the Keeneland sales.