09/25/2008 11:00PM

Market's next step: Lower stud fees


LEXINGTON, Ky. - After a season of decline in the yearling market, stallion owners could be next in line to feel the pinch as breeders push for lower stud fees. But some stud owners warn that lower stud fees are only a Band-Aid for hard times, and that higher purses and a stronger racing product are the real key to breeders' long-term profitability.

Recent results from the Keeneland September sale, the world's largest yearling auction, showed that it was harder this year than last for commercial breeders to make a profit. The sale offered a record catalog of 5,555 yearlings and performed better than many sellers had feared in light of the current general economy and stock market and credit crises. But it still lost 15 percent in gross, 10 percent in average, and 12 percent in median. Yearlings sold there in 2008 were conceived in early 2006, between two consecutive record-breaking Keeneland September auctions in 2005 and 2006. The market seemed flush then, but things began to slide in 2007 and that trend only accelerated in 2008.

Effectively, breeders bought stud fees at a premium and sold many of the resulting yearlings at a relative discount. Now lower stud fees are a must in 2009, many breeders say.

Stallion owners, too, widely expect that fees will drop.

"I would be surprised if stud fees did not go down across the board at a majority of farms," said Case Clay, president of Three Chimneys Farm, whose 2009 roster will include first-year stallion Big Brown. "Fewer breeders made money at the sales, and that puts downward pressure on stud fees in general. But it boils down to each stallion. The question we've been asking is, 'What can the market bear for each of our stallions?' On most of them, the market is different than last year, and it probably can bear a bit less."

Other concessions to market realities might also become more common, like foal-sharing deals or incentive offers to lure breeders to stallions, Clay said.

Trimming fees is painful for stud owners who often pay tens of millions for a single stallion prospect and need fat books of paying mares to recoup their costs. And some warn breeders against focusing too much on the stud fee-to-yearling price ratio.

"We don't have enough people breeding to produce a racehorse; it's all about what they can sell for," said Hill 'n' Dale Farms owner John Sikura. "Judging a stallion by a single dynamic, what his sale yearlings average, that's only part of the reason to breed to a stallion. . . . The fact that a horse produces a high incidence of stakes winners or can help your mare, that seems to be a non-factor, and that's a recent development."

Sikura and others acknowledge that fees will likely fall for many stallions. But they say the real problem starts with inadequate purses at racetracks. That's a problem, because earning potential is a key to determining a yearling's auction value. Sikura, for one, believes that other forms of gaming at Kentucky's racetracks could be one answer to raise Kentucky purses and the value of the state's yearlings.

"Unless they enact legislation to enable us to have additional revenues so owners can run for significant purses, not only will we not have any new owners, the majority of the owners we have now will relocate," he said. "People do have to be judicious in how they set their stud fees and be conscious that people have to make money when they trade with you. But when you have rising costs and stagnating or falling purses, how are you going to attract new ownership? Until you can run a horse for a $75,000 maiden pot, you're not going to have people looking to buy 5,500 yearlings."

That population, as well as fees, will likely drop in the aftermath of the 2008 sales. And breeders will be shopping carefully when they mate the mares they keep.

"I haven't been as guilty as some people about chasing a horse as his stud fee goes up, but I have been guilty of it," said Craig Bandoroff of Denali Stud. "I'm going to do my best to not do that. I'm going to look for value where I think there's value. That could be a horse that has had some good years, then gone quiet, and you're betting he's going to get good again. The high-quality stallions seem to stay hot. But others go hot, cold, and hot again. The trick is to figure out which ones are about to get hot again."

Storm Cat back on top at Keeneland

There were no big surprises among the leading sires (by average price with three or more yearlings sold) at Keeneland September, according to statistics from SireAverages.com.

Storm Cat, whose results faded some in '07, was back with a vengeance as leading sire with an average of $584,737 for 19 sold, followed by A.P. Indy at $550,556 for 27 yearlings. The rest of the top five were Kingmambo, $443,750 for eight horses; Distorted Humor with $401,742 for 31; and Unbridled's Song with $355,125 for 40.

The stallions' 2006 advertised stud fees, on which these yearlings were conceived, were as follows: Storm Cat, $500,000; A.P. Indy, $300,000; Kingmambo, $300,000; Distorted Humor, $150,000; and Unbridled's Song, $150,000.