The gap between purses in Thoroughbred races in the United States and money spent in the American Thoroughbred auction market widened in 2006. While total purses for the year aren’t yet known, the projection is that they will be up by a couple of percentage points to just north of $1.1 billion, which would be an all-time record.
But for the second year in a row and fourth time in the last seven years, purses will fall short of the $1.2-billion gross revenue from 2006 auctions of weanlings, yearlings, 2-year-olds in training, and breeding stock.
The first recent crossover occurred in 1999, when auction receipts of $987.5 million exceeded the year’s purse totals of $962.8 million. In 2000, both key indicators topped $1 billion for the first time, with auction dollars edging purses, $1.1 billion to $1 billion. That was the year I heard the expression, “The only way you can’t make money in the horse business is if you don’t own any horses.”
The bloodstock market tumbled nearly 22% in 2001, to $835.8 million, and dropped another 9.1% to $759.8 million in 2002. Purses, meanwhile, more than held their own, increasing 4% over the two years.
A steady, four-year ascent in bloodstock prices then followed, increasing to $849.2 million in 2003, $1 billion in 2004, $1.1 billion in 2005, and $1.2 billion in 2006. That’s a 61.4% increase in auction dollars from 2002. In that same time frame, purses will have increased an estimated 6%.
Obviously, purses don’t necessarily drive auction prices—at least those on the high end of the market. It’s the residual value as a broodmare or stallion prospect that has pushed prices in the last 12 months to record levels for weanlings, Keeneland September yearlings, and 2-year-olds in training in the U.S., and to a world-record price for a broodmare in England. What keeps the residual prices afloat are the auction revenue expectations breeders have for the offspring of those potential stallions and broodmares and the stud fees they are willing to pay to produce them.
In other words, there is an awful lot riding on the vitality and health of the auction market. If one segment of that market suffers a setback, there is an unavoidable impact on other segments of the market. For example, a bad economic year for yearling-to-juvenile pinhookers logically would hurt yearling sales later in the season because pinhookers have less in profits to reinvest. Any rollback in yearling prices might shake the confidence of breeders, resulting in a weaker market for breeding stock and less willingness to pay high stud fees. The prospect of lower stud fees means yearling buyers may set a lower ceiling for what they will spend on the best prospects.
This isn’t the first time there has been a disconnect between purses and bloodstock prices. In the mid-1980s, yearling buyers and breeders got caught up in an inflationary cycle, much like the dot.com stock market surge of the late 1990s that ended with a crash in 2001. Auction receipts in the mid-1980s outpaced purses by a fairly wide margin. But then, in 1986, came a painful correction in the Thoroughbred market, fueled by several factors, including federal tax reform. It took at least six years for the market to hit rock bottom, which by most measurements occurred in 1992.
The disconnect between purses and bloodstock prices isn’t the only statistical anomaly in the Thoroughbred industry. Purses, which until 10 years ago were fueled strictly by pari-mutuel handle, are now subsidized in many states (“completely dependent” might be a more accurate term) through revenue from slot machines.
As a result, if purses are higher for 2006 than they were one year earlier, the increase will have resulted despite a decline in overall pari-mutuel handle. Take away the slots revenue, and purses surely would have declined.
That’s not a healthy sign for this industry, but it’s the new reality.