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Updated on 09/16/2011 8:49AM
Buyers and sellers meeting in middle
November, traditionally the major month to offer broodmares and weanlings, was a pleasant surprise for Thoroughbred sellers, who feared the worst after 30-percent declines in the major yearling sales.
Two of the season's largest and most important breeding stock sales - the Keeneland November auction in Kentucky and the Tattersalls weanling sales in England - produced substantial revenue gains.
Keeneland's November sale ended with a 4-percent increase in gross revenue (to more than $187 million), a 10-percent jump in average price ($78,767), and a dramatic 40-percent leap in median ($28,000). The Tattersalls weanling sales, which concluded Nov. 30, posted records for all those categories on rises of 34 percent, 9 percent, and 23 percent, respectively.
Now, instead of the pessimism that followed the yearling sales, there has been a burst of optimism among commercial Thoroughbred breeders.
Why were November's buyers willing to spend so aggressively for mares and weanlings? And does the optimism of November presage good yearling sales in 2003, or were the breeding stock sales a case of what Alan Greenspan, chairman of the Federal Reserve, famously called irrational exuberance?
Mare buyers, who essentially are acquiring the factories that produce the stock for yearling auctions, are betting on the industry's long-term health. Weanling buyers, often pinhookers planning to sell those horses as yearlings in about eight months, are focusing on short-term conditions. But both are banking on an upturn.
"We bought four or five mares, and we're sure anticipating more good years in the horse business," said Pope McLean, owner of Crestwood Farm, a commercial breeding operation near Lexington, Ky. "Other people must be, too, because going into the November sales we thought we'd get some bargains, but we didn't. We were also looking for a few weanlings, but the ones we liked went out of sight. A weanling with great conformation would bring double what we felt it was worth."
Like many other sellers, McLean points to two factors that he believes are strengthening the breeding stock market: a spreading of wealth in the yearling market and rising purses at the track.
High end took hardest impact
At the 2002 selected yearling sales, the 30-percent drops in revenue mainly hit the inflated upper market, where a handful of the world's wealthiest buyers previously had battled for yearlings who sold for $2 million and above. But middle-market sellers, eager to move their yearlings, lowered their reserves and found a ready market, as buyers - apparently chastened by stock market turbulence and the economy's slowdown - reined in their extravagance and started looking for potential racehorses that cost less than $500,000.
The shift redistributed some of the market's wealth from the thin upper layer to the wider middle market, enriching a larger contingent of sellers. As yearling median prices rose or held steady and buy-back rates declined in the last several seasons, more sellers left the yearling sales in 2002 with money in their pockets. The best indication of that can be found in the gradual rise in median prices over the last 10 years.
"Yearlings in the middle range actually sold very well, so a lot of people made money and felt they could jump back in and buy horses in November," McLean said. "A few years back, when we had those very high yearling prices, only sellers at the highest end of the market were really making money. The fact that the yearling market picked up in the middle this year certainly played a part in November.
"What goes hand in hand with that is the fact that purses right now are good at the racetrack," McLean said. "With the purses strong, we have legitimate horsemen and investors buying our yearlings because they feel they have a chance to make some money with a horse, and that's why they're looking in the middle market and below. I think that's encouraging for all the sales and the future of the whole market."
Keeneland's director of sales, Geoffrey Russell, said he was particularly surprised by the November results because buying mares means a commitment to long-term investment. But he also pointed out that a bullish November market is no guarantee of stronger yearling markets to come. "I don't think there's necessarily a correlation between November and the next year's yearling sales," he said.
Russell said the more important market considerations were what he called realism and professionalism.
"The November sale just confirmed the adage that good horses sell well and bad horses don't," he said. "In recent years there were a lot of speculators in the market, but now that's largely gone because we're in an era of readjustment, as we saw at the yearling sales this year. We're back to professionalism and realistic expectations from sellers in the market.
"I think sellers who made money at the yearling sales and came back to invest it in the November market are taking an educated risk," Russell said of the 2003 yearling market's potential. "But this is an investment that they know how to manage, unlike if they'd put their money into tech stocks or CD's or General Electric stock. We have to hope the 2003 yearling crop is good. If we have the same sales in 2003 that we had in 2002, I'll be happy."
Foal loss a classic economic factor
Russell said that lingering effects of mare reproductive loss syndrome, which caused thousands of abortions in mares in 2001, may have more effect on the 2003 yearling sales than any patterns established in 2002.
"Will we see the old idea that a smaller supply will create higher demand? We hope so," Russell said. "And some of the organizations who breed to race will need to buy yearlings to restock their racing stables because their mares were empty."
Commercial breeders are sensitive to those factors, and that may be adding to their bullishness now.
"It's a cycle of confidence," said Boyd Browning, chief operating officer of Fasig-Tipton, whose sales include the Saratoga selected yearling auction. "So much of this business, like many other businesses, is based on psychology. Right now, people feel it's a good time to buy horses. I think that confidence does translate across the entire market. You may have some short-term aberrations, but generally the markets move up and down together. There is an overall market psychology that affects 2-year-old, yearling, and breeding stock sales."
But here is where Alan Greenspan's warning against "irrational exuberance" is worth remembering. Confidence may cross markets, but sellers who paid a premium this year to restock their mare bands and yearling consignments may have trouble at the 2003 yearling sales if buyers are not willing to spend more. The result could mean thin profit margins and a growing number of horses who fail to reach their reserves.
The breeders most at risk are the commercial operations that spent the most money at the November sales, the same people who helped make that market so robust. Keeneland's two leading buyers - ClassicStar LLC, which spent $16,665,000 for 26 horses, and Newsells Park Stud, which paid $15,945,000 for 24 lots - have indicated that a significant number of those expensive in-utero foals will head for yearling sales. If those operations intend to make a profit, they will have to produce good-looking horses who cause a million-dollar clamor among the yearling sales' wealthiest buyers. If they lose out at the yearling sales because of cautious buyers, they will likely be more cautious themselves at future November sales, which could lower the breeding stock market again.
"You never want to get your expectations too high," Browning said. "But I do think people had to leave the sales in November at least slightly encouraged."
An athlete is the bottom line
Crestwood owner McLean was one who felt encouraged, and he sees no immediate reason to think the cycle of confidence will break down.
"The end product of these sales is a racehorse going to the track," he said. "The people who have the product in between the time it is foaled and the time it goes to the races feel there is a demand for racehorses. And buyers are figuring out that they don't always have to spend $2 million to get a good racehorse. They're looking for horses in the middle market and below. If you're selling there, you have to have some pedigree, but you can have a super individual that outsells his pedigree by five or 10 times just on looks, because the buyers are emphasizing performance potential over pedigree. I think that's a good thing.
"It used to be that you couldn't make money at the sales unless you were breeding at the very top of the game. But now, this market gives everybody some hope that they can come up with a home-run horse without overspending to produce a horse with the perfect pedigree. As long as the purses stay strong and buyers continue to want horses, I think the future is bright."