Last In, First Out

By Bruce Smart

Articles describing the 2000 yearling sales have trumpeted the enormous prices being paid for fine physical horses by fashionable sires. But for the "little guy" breeder a darker aspect of today's market hits harder -- the financial disaster represented by the prices for the many race-worthy yearlings that lack a stylish pedigree and fall short of physical perfection.

Using The Blood-Horse formula for profitability -- break-even equals two times stud fee plus $15,000 -- the ratio of profitable horses offered on the median sale day at Keeneland September (day seven in 2000; day six in 1999) shrank from 30% in 1999 to 23% in 2000, almost a quarter below an already very discouraging number. Only the first two days in either year averaged above 50%.

But economic reality may be even worse, for the formula seems excessively optimistic to this breeder.

Using the stud fee at the time of conception is like using first in, first out (FIFO) inventory accounting. Since an ongoing business pays current costs to replace inventory just sold, a more realistic practice is to use current stud fees, a last in, first out (LIFO) accounting method. Since fees have generally gone up over the last few years, so would the break-even under LIFO.

The formula doubles the stud fee as its first additive. This amount can perhaps be stretched to cover sales tax, depreciation on the mare, time value of stud fee money for two years, and insurance on mare and foal, costs somewhat related to the size of the stud fee.

The second additive of $15,000 must pay for the upkeep of the mare and foal from conception to weaning, and the foal thereafter until sale -- say two "horse years." Fifteen thousand dollars sounds like a lot until you ask $7,500 per horse year ($20.55 per day) to pay all the breeder's operating expenses.

Lastly, there are selling expenses -- 5% each to bloodstock agent, sale company, plus sales preparation, transportation, and incidental expenses at the sale, say 15% in total, which should be deducted from the gross sale proceeds.

As a result, only yearlings by fashionable, expensive sires make out with any consistency, even under the present formula (adjusted for LIFO). A recent ranking of this year's 70 leading stallions by progeny earnings by The Blood-Horse lists 16 standing for $10,000 or less. These successful but less expensive sires had 28% profitable offspring at the Keeneland sale. Only one had over 50% in that category. It will be hard to equal even this rotten result at lesser sales elsewhere.

Why is the hype of high-priced yearlings, and the corresponding downplay of the dark side of the market, potentially harmful? Here are three reasons:

  • Attention to sale "home runs" draws added mares into production, as owners dream of marginal mothers producing big-bucks babies. This floods the market with lesser horses, drowning the smaller breeder in red ink.
  • Sale prices of "home runs" lead to higher stud fees, adding to the cost of all yearlings, great and small alike. Only the few "greats" can recover these higher fees in their selling prices, and the fees for sires that sold well in September have often been dramatically raised for 2001.
  • Breeder concentration on fashionable stallions leads to large books of mares, with a consequent narrowing of the gene pool as less marketable but still promising sires are squeezed out.

"The rich get richer and the poor have babies" seems an apt comment on today's horse business. A disillusioned group of commercial breeders and a less diverse gene pool cannot bode well for the future. It's enough to make a person breed to race -- which might not be such a bad idea after all.

We could design matings and shop for stallions to produce sound, fast runners without regard for fashion or marketability. We could forget such incidentals as hype, sales prep, commissions, and sale companies. And if our horse was small, like Northern Dancer, we wouldn't care what pinhookers thought about his size. The costs of all these middlemen would be eliminated from our economics.

Our "kicks" would come not from the infrequent big hit at auction, but from seeing our homebreds prove themselves -- and our breeding skills -- on the track.

Come to think of it, isn't that what our predecessors did in the golden days of racing?

Bruce Smart is a retired businessman now living and breeding Thoroughbreds in Upperville, Va.