Ray Paulick<br>Editor-in-Chief

Ray Paulick

The Big Squeeze

The headline accompanying one of the stories reporting on the Keeneland September yearling sale in the Sept. 29 edition of The Blood-Horse was blunt and to the point: "Rising Stud Fees Squeeze Profits."

Comments from a number of consignors and buyers also were telling. From the buyer who said she "got some bargains" to the consignor who observed that "50% to 60% of the horses that went through the ring (on day nine) did not bring their stud fees," it's clear breeders are facing a challenge. It is reminiscent of the cycle of the 1980s: rising yearling prices fueling (and fueled by) record stallion syndications, leading to higher stud fees and an increase in supply, then followed by a crash.

The increase in supply of the late 1990s and early 2000s is not nearly as dramatic as the spike in the number of foals produced in the 1980s. From 1980 to 1985, the North American foal crop shot up by 44%, from 35,679 to the all-time record 51,296 in 1985. It tailed off from there to a low of 34,973 in 1995 and has risen to an estimated 37,300 in 2001, an increase of less than 7% over six years.

What has risen sharply in the last several years are stud fees, while yearling prices may have reached their peak. Results of 2001 yearling sales suggest things are going to get worse for Thoroughbred breeders before they get better, even for those involved at the top of the market.

The Blood-Horse and its industry newsletter, MarketWatch, consider a sale profitable if the hammer price (minus the sale company commission) exceeds an amount two times the stud fee plus a $15,000 estimated cost of raising a yearling. Unless otherwise stated, stud fees are used from the year the sale horse was conceived. All horses listed as reserve not attained (RNA) are considered unprofitable. Return on investment (ROI) is based on the same formula but only calculates horses that sold.

Stallions that stood for a live foal stud fee of $100,000 or higher in 2001 have had 423 yearlings offered at public auction thus far this year. From those offered, 300 were sold, with a median price of $305,000. An estimated 196 of the yearlings sold for a profit, or 46% of those offered. But that profitability is based on the stud fees paid in 1999, when the yearlings were conceived. The average fee in this group was $102,504.

If the 2001 stud fees from the same stallions are applied, profitability drops to 121 yearlings sold, or 29%. That's because the average 2001 fee was $197,760, an increase of 93%. That substantial increase in production costs is not likely to be matched by a similar rise in prices.

In 2000, stallions at the $100,000-plus stud fee range combined for a yearling median of $425,000, with an estimated 55% through the ring sold for a profit.

This top level traditionally has provided the greatest opportunity for profits. Using 1999 stud fees, we calculate that the 300 yearlings to sell had an average ROI of 150%. Apply 2001 stud fees and ROI drops to 34%.

Moving closer to the low end of the commercial market does nothing to brighten the picture. The stallions currently standing for $5,000-$9,999 were represented by 1,609 yearlings through the ring, with 1,143 getting sold. However, with a median price of $9,500 and an average 1999 stud fee of $6,225, the profits are virtually non-existent. Only 215, or 13% of the number offered, were estimated to be profitable. The only good news here is that most stud fees in this price range are unchanged from 1999.

Stallion managers were slow to react in the 1980s, leaving stud fees at inflated levels after yearling prices tumbled. With the current market trending in a downward direction, they would be wise to exert caution in their pricing strategies for 2002.