Ray Paulick<br>Editor in Chief

Ray Paulick
Editor in Chief

Will History Repeat?

An interesting development occurred at the Keeneland September sale, which took place during a nervous time for stock market investors and for breeders who consign at the top-end of the yearling market. The auction ended with mixed economic signals: average price and gross receipts were down, while the median price increased. Buy-backs decreased, reflecting an attitude among an increasing number of consignors that a horse is worth what the market is willing to pay, not what the breeder has invested in it.

The above scenario actually describes what occurred at the 1986 Keeneland September sale. The Dow Jones Industrial Average had just experienced one of its worst weeks in history, and the average price for the 1986 Keeneland and Fasig-Tipton Saratoga summer select sales was down by 25%. The Keeneland September sale average fell by 11%, gross receipts were down 9%, and the percentage of horses withdrawn or bought back was just 20%. But the median price for the 1986 September sale was up.

Who says history doesn't repeat?

In 2002, a new generation of investors has been unnerved by the gyrations in the stock market, and top-shelf Thoroughbred breeders watched summer select sale yearling prices beat a hasty retreat from record highs in 2001. The two select sessions that opened the 2002 September sale followed a similar pattern, putting many breeders in a hole. But all was not lost: there was strength in the middle market that helped give the sale its first increase in median price since 1999. The 18% decline in average was largely felt by those breeders who gained the most ground in the 1990s, when double-digit increases in average were the norm.

From 1994 through 2001, the average price of a September yearling soared 136%, jumping from $37,181 to $87,803. It dropped to $71,850 in 2002. From 1994-2001, the median price gained a pitiful 14%, edging upward from $22,000 to $25,000. Its increase to $30,000 this year was welcome news for many breeders.
What happens next is the big question. Will the bloodstock market continue down the same path it did in the late 1980s and early 1990s when million-dollar yearlings virtually disappeared and middle-market prices stagnated? Select sales were hurt the most in the 1980s crash, but even the September sale average fell by 15%, from $33,416 in 1985 to a 1992 nadir of $28,478.

Contributing to that eight-year slump was the Tax Reform Act of 1986, which made it less attractive to invest in horses. Declining prices also were caused in part by a huge spike in the foal crop in the early 1980s, which flooded the market with oversupply. A third factor was a poor racing economy that saw total purse money decline from 1989-93.

Those conditions do not exist today. If anything, recent tax changes have given people more of an incentive to buy Thoroughbreds. The size of the foal crop, which declined steadily during the late 1980s and early 1990s, has stabilized in recent years. Purses enjoyed substantial growth in the late 1990s and continue to increase in markets that benefit from slot machines and similar devices. Possible installation of the machines in several markets may jump-start prize money in other states.

One similarity to the 1980s is the inflationary trend in stud fees. Simply stated, they rise quickly in a boom market and fall slowly when commercial prices decline. Unfortunately, the risk associated with a two-year production cycle from breeding shed to sales ring is something that comes with the territory. So does the risk associated with breeding farms or syndicates bidding tens of millions of dollars to acquire stallion prospects in a competitive market that suddenly turns soft.

Make no mistake, a market correction is under way. But it should not have the severity or persistence that it had in the late 1980s and early '90s.