11/07/2008 1:00AM

Soft bloodstock sales hurting stallion farms


LEXINGTON, Ky. - The withering 2008 bloodstock market is taking a toll on stud farms in the form of late stud fee payments and delayed season purchases, according to stallion owners and bloodstock professionals. And while profitable stud farms with cash cushions are positioned to ride out the storm, many fear stud farms with higher debt loads or lower-quality stallions will find it hard to survive a market downturn that has proven deeper than expected.

The bloodstock market appeared headed for a long-anticipated correction this summer, when yearling sales began with lower prices. Then the global financial crisis and credit freeze hit during Keeneland's important September sale, the largest yearling market in the world, and prices plummeted farther than expected. The losses have deepened at Keeneland's ongoing November breeding stock sale, where gross sales were down 47 percent and average and median price were off by 36 and 33 percent, respectively, through Thursday's session.

Stallion owners are vulnerable because their income rests on breeders' ability to pay stud fees and keep sending mares back to their stallions. And they are at greater risk if they borrowed heavily to acquire expensive studs during the decade-long stallion market boom, counting on large books of future mares to pay off the bill. Now stud fees are falling and breeders are culling mares, leaving some stud farms with less hope of recouping their acquisition expenses quickly, if at all.

"Stud fees are being slashed, through no fault of the horse, but because of the market," said Jamie LaMonica, co-owner of Empire Stud in New York and a partner in The Stallion Co., specializing in stallion acquisition, syndication, and brokering of seasons and shares. "Basically, we bought things that today are worth considerably less, solely because of market conditions."

Stud farm operators say there's already been an increase in late stud fee payments. They believe that's due partly to the market slump and partly to the effects of the wider economic crisis, which has created cash-flow problems for breeders who make their living in other industries.

One farm owner with stallions priced between $2,000 and $10,000 this year, who asked not to be identified, said he is on the verge of filing several lawsuits to collect some stud fees, adding legal fees to his farm's expenses. While the view is not as bleak at some of the farms standing more fashionable stallions, those operations say they, too, see signs that breeders are struggling.

"We saw our fees come in later than normal," said Three Chimneys owner Robert Clay. "Some that would have been paid in August are being paid in October after the September yearling money came in. I don't think our bad-debt expense is going to be any worse this year, but we'll be watching that. Breeders are facing difficult times."

Breeders who used to commit to stallions in the summer and early fall also are waiting longer to make their mating decisions, a trend that's prompting nervous stud owners to cut deals and offer breeding incentives well in advance of the mating season's February start. Most area farms have cut stud fees. Others also are offering extended payment terms, as Three Chimneys has, to allow breeders to pay later; more foal-share agreements that waive the stud fee in exchange for half-interest in the resulting foal; "breeder loyalty" rewards that offer additional discounts on sires breeders have supported at higher fees in previous years; and other incentives. But these terms often delay a stud farm's income, making them realistic only for stallion owners who can afford to wait for revenue.

The concerns are not limited to Kentucky.

"There's no question the stallion market is very tough right now," said Mike O'Farrell, owner of Ocala Stud in Florida. "I'm not being real aggressive about getting new stallion prospects. Stud fees are very hard to collect. Everybody's making deals, they're giving away trips to the islands, if you pay your stud fee your name goes into a hat for a $25,000 drawing like a lottery. It's gone crazy, and it's a very tough environment for stallion owners."

La Monica and others partly blame unlimited expansion of book sizes, which they say added fuel to stallion acquisition prices and also contributed to oversupply at horse sales, driving breeders' payoffs down.

"Book sizes need to be reduced," LaMonica said. "We've removed the 'specialness' from our commodities, because the books are so big. Fundamentally, our industry had a bad business model before the general economic crisis hit. We are producing more product for fewer people participating as end users. It's a game of musical chairs with fewer chairs."

LaMonica would prefer the Thoroughbred breeding industry use self-restraint to bring down book sizes, operating on a business model more like that in the diamond market.

"I'm a capitalist to my core, but we are a commodity business, and for a commodity to mean something, you have to limit supply and demand," LaMonica said.

Ted Berge, a senior banker at JPMorgan Chase who has handled Thoroughbred industry loans for two decades, says he hasn't yet seen an increase in liens or sales to pay off bank debts. And he believes breeders who wait to commit to stallions in the current buyers' market for stud fees are "behaving rationally." But the combined global and Thoroughbred economic downturns are likely to tighten credit conditions for breeders and stallion owners, he warned.

Still, this market downturn should not cause panic, Berge said.