09/15/2009 11:00PM

Stallion owners feeling pressure


LEXINGTON, Ky. - We've heard it a lot in the last two days: "Stud fees have got to come down!"

The Keeneland September yearling sale's select sessions ended Tuesday with a 48 percent loss in gross from last year, a 30 percent drop in average, and a 28 percent hit to median price. Now commercial Thoroughbred breeders are adamant that stallion owners must lower their stud fees - often the largest single expense in producing a foal for market - for the upcoming 2010 breeding season.

"I would think they should come down," said Stone Farm owner Arthur Hancock III. "And what I think also ought to come down is breeding these stallions to so many mares. It's the old law of supply and demand. You get 80 yearlings out here at one sale by one stallion, the poor people who breed to that horse, most of them are going to take a beating."

But the issue is complicated, say stallion owners. In the last 15 years, prices for stallions escalated dramatically. Wealthy global operations Coolmore and Darley helped push prices up for top stallion prospects, often paying tens of millions for a colt they wanted. That increased competition for remaining horses as other farms, unable to outbid Coolmore and Darley, stretched their resources to acquire new young stallions.

To pay for those horses, farms often counted on 100-plus mare books at set stud fees, hoping to pay off the bill in three years. Now that prices for the resulting yearlings have crashed and breeders have pulled more mares out of production, stallion farms are caught in the middle. Many slashed stud fees last year and cut extraordinary deals with breeders, all owing delayed payments of a year or agreeing to drop stud fees altogether in foal-share agreements, in exchange for half-ownership of the foal. That's a game most stud farms can't afford to play indefinitely.

John Sikura's Hill 'n' Dale Farm, home of such sires as El Corredor and Stormy Atlantic, built its stallion roster aggressively over the last decade. It launched the successful careers of young hotshots Medaglia d'Oro and Candy Ride, among others, and Sikura has unabashedly used big books to help such stallions get their start. He bridles at the suggestion that stud owners, who had to pay exorbitant prices when times were good, must slash their fees and books again when they're under pressure, too.

"Stud fees came down significantly last year," he said. "The stud market is just like the yearling market. Once everyone's hysteria levels out, they're still going to want to breed to the same horses. The difficulty you have standing stallions is that people are completely risk-averse, and everybody wants to breed to the same horse. You can't say, 'I want to breed all my mares to this horse, but you can't raise his stud fee and you can't breed too many other mares to him, and you have to take all of mine.'

"It's certainly a buyer's market for stallions, just like it is in the yearling market. There are 14 sessions at this sale. Maybe there will be readjustment, but we have to wait until the sale is over and see how the economic rebound is.

"If you just bought a stallion prospect in 2008, you bought him based on that market," he added. "You can't buy a horse for $5 million and stand it for $5,000."

At the racetrack, prices have fallen sharply for stallion prospects. But stud farms realize the equation is no longer in their favor now that broodmare numbers and yearling prices are falling. That's having some effect even at the yearling market. Colts have less residual value today for buyers who once dreamed of winning a graded stakes and then selling their colt's breeding rights for a fortune.

"The $50 million syndication package, those days are gone," said one stallion farm owner.

That lowers the price many bidders are willing to spend on a colt, because, for now, they can't count on making a big future sale if the colt turns out to be a runner. In a stallion market downturn, successful fillies have stronger residual value. That's probably one reason why two of the sale's four seven-figure purchases through Wednesday afternoon were female.

"Yes, it's tough for a lot of people, and they paid large stud fees to breed these horses," said John Ferguson, Darley's chief bloodstock adviser. "Obviously, this year is tough. The great thing is, the stallion operations reduced their stud fees last year, so although there's pain here, hopefully going forward there will be readjustments right across the board. And that's how the game has to work. You start off buying the mare, you then pay the stud fee, and that has to be reasonable. You then have to have a chance at getting out. And from stallion masters' point of view, successful racehorses coming off the track have to be more reasonable, because the mathematics has to work."

But asked whether Darley would take the lead and cut its stallions' stud fees in 2010, Ferguson demurred. "It's way too early to make comments of that kind," he said.