Ray Paulick<br>Editor in Chief

Ray Paulick
Editor in Chief

A Taxing Year Ahead

People in the Thoroughbred industry might see some similarities between 1986 and 2001. And for that reason, they've got a right to be a little nervous about things.

In 1986, The Jockey Club registered an all-time high 51,296 foals in North America--twice the number registered just 15 years earlier, in 1971. Breeders were coming off a year, 1985, when the average price of a yearling was $41,311, nearly five times the average from 1971.

Despite the soaring auction prices, all wasn't rosy. Overproduction was rearing its ugly head. The percentage of horses failing to reach their reserve prices had been on the rise. The concentration of dollars at the high end of the market (1985 was the year of the $13.1-million yearling) camouflaged the economic problems of many middle-market breeders.

Then all the trouble began. The yearling average plummeted 17% in 1986, signaling a rocky ride that didn't bottom out until 1992, when it reached $22,791--fully 45% below its peak and the lowest yearling average since $19,846 in 1978. The size of the foal crop fell by 32%, hitting a low of 34,973 in 1995.

The market has recovered nicely. From 1992-2000, average yearling prices more than doubled to $54,506. Combining the four main segments of the auction market (weanlings, yearlings, 2-year-olds, broodmares), Thoroughbred sales topped $1 billion last year.

But, just as in 1986, all isn't rosy.

Supply, as measured by the number of horses offered and sold, rose substantially last year, and the size of the foal crop is moving upward again. The percentage of horses offered but not sold increased in 2000. Median prices for weanlings and yearlings were down. Just as in the 1980s, there was heavy concentration at the top of the market, with an all-time high 57 yearlings selling for $1 million or more. Analysis of middle-market prices showed an increasing number of yearlings failed to sell for a profit.

Lagging a step behind in the bull market of the late 1990s were increases in stud fees and prices for shares in syndicated stallions. They've since caught up and, many breeders feel, have surpassed the increase in auction prices. Delayed reaction to a downward market by syndicate managers who didn't lower stud fees fast enough is what cost so many breeders in the late 1980s. Remember, commercial breeders making decisions today will not know if they were sound until their foals of 2001 are sold as yearlings in 2002. There are no crystal balls with 20/20 vision.

Another similarity between 1986 and 2001 is tax reform. The Tax Reform Act of 1986, pushed by President Ronald Reagan, was widely blamed for either causing or escalating the Thoroughbred industry's economic problems. A decrease in the tax rate, coupled with an increase in the capital gains rate and repeal of passive loss rules, served up a triple whammy for many Thoroughbred owners and breeders.

There hasn't been any tax reform in 2001, but it is high on President George W. Bush's first-term agenda. His proposal will push for a reduction in the income tax rate (not surprisingly, it's moved upward since 1986), which historically has not been good for the Thoroughbred industry.

Bush's package is also expected to include removal of the estate tax, which has been a hardship on many farm owners who inherited valuable land but had difficulty coming up with the money to pay taxes on the inheritance. That legislation came close to passing in the final year of President Bill Clinton's administration.

If the horse industry is lucky, perhaps the Bush tax plan also will include language that shortens the capital gains holding period for horses, from 24 to 12 months.

So we have a commercial market that is showing signs similar to the 1980s and a president bent on tax reform. Will history repeat?