Musings: The State of the Breeding Industry

I'm not going to lie: the ridiculous success of the Keeneland November Sale caught me off guard. After attending the Fasig-Tipton July Select Yearling Sale and keeping close tabs on the most important sale of the year, the Keeneland September Sale, I saw much of the same as the last few years: Buyers stll shelled out for the highest quality, but everything less than the cream of the crop still suffered in terms of the price at which the hammer fell.

But this sale was ridiculously good. November is where we usually dabble in that we are selling a handful of mares and weanlings and buy a few as well. Typically, you can identify a dozen or so mares in foal that you know will be in your price range and maybe you get lucky and take home 1 or 2. But as I talked to our agent and those others that I knew were in attendance (unfortunately my day job got in the way this year; damn bills) mares were going for 2 to 3 times their reserve, which is crazy and shows that it caught everyone off guard. I can say that most of the mares in foal went for too much; people definitely over paid.

However, over paying isn't necessarily a bad thing. It probably just indicates another change in the equilibrium between supply and demand. The one big point that the talking heads keep hitting on is the smaller foal crops since the Crash of 2008 have yielded. While I keep banging the drum that the mares that are not bred now were the lowest quality ones where the profit margins would have disappeared for breeding purposes once the prices crashed, most are not listening. There is no such thing as national autarky when it comes to breeding. There is a worldwide market for the best quality bloodstock.

The hidden point behind the shrinking foal crop, which looks like it may have stabilized, is not that there are less horses. Really it means that there are fewer broodmares. When our prices crashed, the big players (and I mean Americans, Euros, Japanese, etc) still had the cash to buy, but now they could buy in bulk. The number of new buyers that popped up at Keeneland and Fasig-Tipton and OBS increasingly were of the foreign variety. When the Japanese or Chileans or Brazilians or Russians or Koreans buy a mare, she's gone. Countries that are making the concerted effort to build up their broodmare band and racing industry have a huge incentive to hold on to those mares and breed them in their own country.

Just take Korea as an example. They recently purchased Hansen (in my humble opinion, they can have him) to help establish a breeding program to rival their neighbors. They may have a long way to go, as Japan and Australia are world class programs, but the point is that they are trying. Increasingly you see "sent to Korea" or results from Korea within pedigrees. While not a top-notch contributor to the industry worldwide, they've siphoned off enough talent from the States that it makes an impact.

Therefore, with less broodmares, each broodmare prospect or mare in foal becomes that much more valuable. This year, one agent I know had orders for 30 broodmares. Due to the skyrocketing prices, he was able to fill 3 of those orders. That's crazy. In fact, a few of the commercial breeding operations that typically buy mares in foal, foal the mare, sell the baby, and resell the mare in foal again, had to resort to buying weanling fillies with the intent of breeding them eventually. That's a tough sell on the bottom line. That means you have the sale price, the costs of boarding the filly, training costs, and then ultimately the time it takes between investment and payoff.

The change in the dynamic of the market has caused a number of operations to shift foci. In lieu of pinhooking mares and babies, I know that some are looking at the tracks to claim for breeding purposes. Instead of finding bargains at the sale (no matter whether foals, yearling, or mares) you're looking to hold on to the mares you have now to sell the babies.

All of these developments are good ones. I'm not trying to disparage the most recent developments. Structrual changes in the industry are generally positive since these are the only means by which you can account for those minute (or grand) changes in both supply and demand. In breeding, there are no SEC rules arbitrarily set by disconnected regulators, no oversight to prevent major shifts in prices. Instead, you have a far purer form of economic indicators than the stock market is to the overall economy. Breeding and racing are integrally related in a sense that is far removed from the traditional, "you can't keep retiring colts at 3!" and "why not keep racing her?!?". Without the money from the breeding industry, THERE ARE NO HORSES. There are very, very few homebreds whose intent when bred to race and make money. The Phipps, Janneys, Repoles, Strawbridges, and royals of the world don't necessarily intend to make their income off of racing (because they don't need to, it's a hobby). But those breeders that make the decision to breed or leave a mare barren are the ones whose livelihood depends on what is happening within the sales ring.

In the end, the increases in prices cannot be a bad thing. The incentives to spend money in Lexington, whether in the auction ring or the stallion barn, encourage breeders to make a certain set of decisions. Changes in those decisions are neither good nor bad, but instead indicate some alteration to the delicate supply and demand balance. Now barring some sort of 2008-type crash, it seems that things are looking up. But we have seen how fickle the market can be. We've seen two years of steady increases and finally (FINALLY!) buyers opened up their pocketbooks. Let us hope for more of the same success in January and beyond.