MONDAY MORNING QUARTERBACK: BREEDERS BLEEDING RED INK
By Ray
Paulick
When Rob Whiteley managed the Foxfield commercial
breeding operation for corporate raider Carl Icahn, he had to
justify every dollar on the ledger sheets for the real-life Gordon
Gekko. You couldn’t pull the wool over Icahn’s eyes on fiscal
matters.
Today, free from Icahn, Whiteley runs his own operation,
Liberation Farm, breeding and selling Thoroughbreds for the
commercial market. He applies many of the lessons and disciplines he
learned from his old boss. Coming out of the recent Keeneland
September yearling sale, the most important marketplace for
commercial breeders, Whiteley examined the profitability of the
business he has dedicated himself to since leaving academia 25 years
ago (his pre-racing resume includes Stanford,
Rutgers, Harvard and the University of California at Berkeley).
The resulting article was published in the Thoroughbred Daily News last Friday,
Oct. 3. If you haven’t read it, and you have any interest in the
future of this business, Whiteley’s analysis is a must-read. (The
TDN is a subscription-only site, but there is no charge for an
online subscription.)
What Whiteley found
may have been shocking to some, though not necessarily surprising to
the many small, blue-collar breeding operations scattered across the
rural landscape of Central Kentucky: breeders are bleeding red ink.
Many of them face uncertain futures, even without the greater
financial crisis brought on by tighter credit markets from the Wall
Street/banking meltdown.
Whiteley found that fewer than one in five yearlings catalogued
to the Keeneland September sale led to a break-even or profitable
result for its breeder. He detailed the example of how a yearling
produced through a $20,000 stud fee and selling for $70,000 at
public auction (3.5 times the stud fee) does not cover all the
expenses associated over the 30 months it took to plan, produce,
raise and bring the horse to market.
The most profitable days of the September sale, of course, came
at the front end, when not quite two of five yearlings catalogued
(38% on days one and three, 37% on day two) broke even or sold for a
profit. After the first eight sessions of the 15-day sale (in other
words, all of the second half), profits were as thin as a Parisian
runway model – the high was 14% of horses catalogued on day
nine and the low 0% on day 15.
Worse, Whiteley’s expense assumptions in his profit-loss
formula may be on the conservative side. He doesn’t factor in the
general and administrative expenses that most businesses absorb or
the three in 10 chance that a mare will have a non-productive year
(barren, slipped or dead foal).
The problems breeders face are mounting. The price of hay,
feed, fencing and vanning are quickly accelerating. Auction prices
are retreating, and there is little being done on the national level
to bring new end-users (horse owners) into racing. The industry is
retracting on many fronts.
Not all breeders are affected equally. For those operations
that are secondary businesses or hobbies for multi-millionaires or
billionaires who inherited their money or made it in other
industries, the losses may be used to write-off profits made
elsewhere. Major breeders who stand high-end stallions have that
lucrative end of their business to hold them up.
But where this hits especially hard is the backbone of the
industry, the small mom-and-pop operations that may own a half-dozen
mares, sell their best yearlings and race the rest. They don’t have
income from other industries or trust funds to balance their
spreadsheets, but they do, collectively, have a huge impact on the
overall infrastructure of the horse industry.
Whiteley isn’t whining, and no one put to a gun to his head to
buy all those mares he now owns (or co-owns with a bank). He also
understands that free-market economics, and the laws of supply and
demand, need to run their course. He didn’t publish his complaints
without also coming up with what he believes is a short-term
solution.
The article describes the industry’s “big three” as sale
companies, the veterinary community and stallion owners, and
suggests they will be the next group to suffer if the economics for
breeders do not improve, and they are forced out of the industry.
Fewer breeders will result in lower demand for stallion and
veterinary services, and certainly lower profits for Keeneland and
Fasig-Tipton.
Whiteley calls for an economic stimulus plan to be borne by the
big three: for 2009 only, a 50% reduction in stud fees, a 50%
reduction in the cost of services (and medication markup) provided
by veterinarians and a 50% reduction in the commission collected by
sale companies.
Of course the chances of this actually happening are somewhere
between slim and none. Stallion owners will say their fees are based
on demand, and veterinarians will cite their rising costs and the
investments they’ve made in equipment and education. Sale companies
will say they’ve got to making a living, too.
Something, somewhere has to give, or we will see a major exodus
from the industry of small businesses. That won’t be good for
anyone.
MORE BAD NEWS ON THE RACING FRONT. Turfway Park closed its fall
meeting with significant declines in business, both on and
off-track, where handle fell 18% and 20%, respectively. There were
circumstances to the numbers being so far down (aren’t there
always?), but they add yet another chapter to a very troubling
sequence of bad economic news for the pari-mutuel side of the
Thoroughbred industry.
Keeneland did a very good thing when it purchased Turfway Park
and perhaps kept it from being developed for commercial use, though
I’m not sure why it is necessary for the cash-rich company to have a
partner in Turfway that has no interest in the success of horse
racing (a casino company). Many blue-collar Kentucky breeders race
their horses at Turfway Park, and the decline of the track since its
purchase by Keeneland and partners has been yet another blow to
those breeders, who are now shipping their horses to race out of
state in increasing numbers to places like West Virginia and
Pennsylvania.
Turfway needs an injection of capital and creative or
intellectual investment that Keeneland so far is not providing.
Investing in Turfway is one way of helping Kentucky’s
breeders.
Copyright © 2008, The Paulick
Report