02/16/2012 1:26PM

Kentucky breeding industry doing more with less


LEXINGTON, Ky. − Nearly four years after the bloodstock market’s 2008 crash, there is some evidence the Thoroughbred breeding market has turned a corner. Last year’s rising auction prices could be the longed-for green shoots of economic recovery. But breeders and stallion managers say the 2008 recession has left deep marks on Kentucky’s breeding business, from a decline in mare population to the terms of breeding contracts. They predict some of those changes could affect Bluegrass farms − stallion operations, breeders, and mare-boarding facilities − for at least several more years, not always for the worse.

In 2008, when oversupply and easy credit in the Thoroughbred business ran headlong into the global economic crisis, the horse industry’s widely predicted “correction” turned into a painful crash. The new reality: tighter credit, reduced inflation in horse values, a smaller overall supply to meet auction demand, and innovation at stallion farms as they compete for fewer mares. That’s not necessarily bad for long-term health, many industry participants say.

“The real positive is that the people who are continuing to participate are doing it with a whole lot more equity dollars over borrowed dollars,” Four Star Sales co-owner Kerry Cauthen said. “There are some banks willing to do some business, but the value of borrowed dollars in the business right now is at least half and probably a quarter of what it was. That’s a good thing, because it takes some of the speculation out of the business.”

The most lasting change is likely to be in the broodmare population. Between 2007 and 2011, the number of active broodmares in Kentucky has plummeted 28 percent, from 21,594 to 15,576. There are a number of factors behind the decline, breeders and boarding farm owners say. Some are moving to foreign and regional markets, some are going into production as sport-horse or cross-bred breeding programs, and some have gone out of production as their owners trimmed or refined their breeding operations − or got out of the business altogether.

Some boarding operations, such as Brookdale Farm in Versailles, Ky., have offset some mare losses by diversifying with new clients from overseas markets not as badly hit by the recession, particularly Australia. That growing international clientele also prompted Brookdale to expand one of its services: breeding mares on Southern Hemisphere time.

“Our farm population didn’t take a terrible hit,” Joe Seitz, Brookdale’s director of sales, said. “We probably saw a 10 to 15 percent decline from 2008 to 2011.”

The farm has about 80 mares, of which Seitz estimates 60 percent are client-owned.

“It’s gradually climbed back to almost pre-recession levels,” he said. “We’re fortunate. We have quite a few long-term clients, and we’d also been recruiting internationally for about 10 years. It just happened to get some traction about five or six years ago, and it worked out well that during the tougher times.”

Seitz said domestic investing in mares hasn’t yet picked up as much as he expected.

“We figured there would be a lot of sharp, savvy bargain shoppers who would pick up serious bloodstock, but I think people have been pretty guarded,” he said. “It’s changing slowly. But it’s not like the stock market where everything crashes one day and guys run in and buy those cheaper stocks the next. That didn’t happen with horses.”

The drop also is a double-edged sword for the people who enjoyed the auction ring’s financial upswing last year: consignors.

“We’re getting supply in line with demand, which obviously means more dollars per horse, but fewer horses,” Cauthen said. “I don’t know that we have fewer consignors out there. So my personal concern is maintaining a good, reputable group of horses to present for sale every year. Consignors always need inventory. Even this year, we still have people whose horses are working their way through the pipeline, and they either won’t be breeding as many or aren’t going to be breeding any at all. I think the loss of mares continued through 2011, and I think there will be some refinement in 2012. The rate of loss is definitely decreasing, but it might not level out until 2013.

“I do think it’s healthy,” Cauthen said. “It’s something we probably needed to deal with eight to 10 years ago but, for a variety of economic reasons, didn’t have to.”

For stallion masters, a smaller number of mares to breed has little upside, especially for farms that purchased horses when the market for stallion prospects was inflated by high expectations for large mare books, and banks were willing to extend credit to stallion buyers and mare owners alike. But there is one silver lining for stud farms now.

“I know we’ve had an easier time acquiring stallions,” said Spendthrift Farm manager Ned Toffey, who estimates that prices for stallion prospects have dropped roughly 30 to 40 percent. “What you see is that there haven’t been as many players on every horse, and I think farms have gotten much more selective about what horses they’ll go after. The market for stallion prospects right now is much more affordable for horses that have had a good racing career. There are only one or two horses a crop where you’re really seeing a number of people willing to go really strong on them.”

That has allowed some operations, such as Spendthrift, to expand their roster with young stallions.

But as mares have left production, some stallions have also dropped out of the Kentucky market. In 2007, there were 368 active sires in the Bluegrass State. By last year the number had fallen 32 percent to 250 stallions, accelerating a downward trend that had started back in 2000. Interestingly, though, the average book size for stallions remaining in Kentucky has gone in the opposite direction: up. In the same five-year period, the average book for a Kentucky sire rose 6 percent, from 58.7 mares to 62.3 mares.

The reason, stallion and mare owners say, isn’t because more mares are flocking to horses across the board. It’s because Kentucky’s market has scaled down to the most viable horses in a highly competitive marketplace, and a relatively small group of highly popular stallions commands larger books.

“Outside of probably 10 or a dozen stallions who are the absolute flavor of the moment, you have opportunities to get into books that, in the past, you wouldn’t have been able to get into at all,” Four Star’s Cauthen said. “And in some cases, you can get into them at a more reasonable fee, by breeding multiple mares, for example. There’s a lot of negotiation out there. On the down side, I see a number of stallions who on a little good news have jumped up in price. Some of those raises are reasonable, but many are jumping the gun. Breeders have lost their shirts over the last three to four years, and the only way we can keep breeders in the business is to allow them to make a profit in the next three to five years. If stud fees get out of control too fast, those stallions either won’t be bred to or they’ll diminish those horses’ longevity.”

As the mare population dwindled and the remaining breeders focused on quality, proven sires, the first-year stallions and those without blue-chip records were suddenly at a serious disadvantage. The most fashionable and accomplished stallions can still attract an oversupply of mares, but for stallions not yet at that level, it’s still largely a buyer’s market.

Stud farms’ efforts to keep their horses’ books full have led to a broad range of incentives designed to lure breeders and their mares in the front door. In 2009, the first breeding season after the economy crashed, such deals were rarely published. In the seasons since, breeders have seen a dazzling array of public offers, ranging from reduced or even free board for mares under certain circumstances to multiple-mare stud fee discounts.

Spendthrift started a trend with a program it calls Share the Upside. Under the program, a breeder earns a lifetime breeding right to a stallion simply by breeding a mare to the horse for each of the sire’s first two years at stud, paying the stud fee when the foal stands and nurses. Other farms, including Kentucky’s Darby Dan Farm, also have picked up the concept for some of their stallions. The farm gets crucial early support for its participating stallions, as well as a corps of potential mares long term, and the breeder has the chance to see a big return if the stallion hits it big.

These kinds of programs work, Brookdale’s Seitz said.

“They’re very tempted,” Seitz said of his clients. “Those things are enticing, and we’re interested to see how all this plays out.”

That wait-and-see attitude is helping drive stud farms’ marketing innovations, and Spendthrift’s Toffey thinks that could be the case for a while.

“Maybe we’ve helped change things,” he said. “Maybe the days of standing a horse and running a few ads and waiting for the phone to ring may be over.”

Kentucky breeding trends

2011 15,576 250 62.3  
2010 17,131 293 58.5 8,326
2009 18,940 342 55.4 9,525
2008 21,188 355 59.7 10,301
2007 21,594 368 58.7 10,514
2006 21,145 384 55.1 10,466
2005 20,688 381 54.3 10,037
2004 20,110 384 52.4 9,835
2003 19,898 388 51.3 8,761
2002 19,668 391 50.3 8,255
2001 20,281 438 47.3 9,858
2000 20,713 438 47.3 10,118
1999 19,736 458 43.1 9,895
1998 18,740 441 42.5 9,495
1997 17,605 440 40.0 8,933