Scenes from the Keeneland September Yearling Sale
(Photos : Keeneland)
“It’s not the strongest of the species that survive,
nor the most intelligent, but the one most responsive to change.”
- Charles Darwin
Last week, we penned a piece about a better deal for broodmare owners. While it is so that markets for young stock in this country have stood up better than in most countries, the truth is, we can make things better, and there are lessons to be learnt from those nations that have suffered to a greater degree than we have. The extreme example of “blood-letting” resides in the United States, where, despite the outward impressions, breeders still lost more than $100million at this year’s marathon Keeneland September Sale. While in some respects the sale could be counted as a success, measured in terms of the improved percentage of horses sold, specific areas of the market which stood their ground and the fact that things seemed to be getting better, it’s a scary thought that breeders have collectively lost a half billion dollars over the last four years, which compounds the problem.
No matter how spinners spin the spin, when an already struggling industry loses a half billion dollars in the “churn” needed to re-supply the overall system, the only word that comes to mind is crisis. Now there are all sorts of things that contribute to this malaise; one is a market that has been over-traded for many years and which has suffered all of the consequences of over-pricing. For an awfully long time, the top-end of the American market thrived to a degree that stallion fees (and hence the overall cost of production) spiralled out of control. When the international economy nose-dived and the principal supporters of that market (and especially the rulers of Dubai), clipped their own wings, the overheads breeders had incurred in developing and operating their farms had reached a point of no return. Coupled with a racing industry in the US which is based almost entirely on private ownership and the need to provide a return to shareholders (there isn’t a model anywhere that works long term along these lines), you had the perfect recipe for a storm.
On the surface, this is a crisis for breeders who form the headwaters or the main tributary for the revenue stream from which many service providers drink. Below the surface, therefore, those suppliers who also depend on the revenue stream from auction sales feel the pain as well. This is obvious, because as the river shrinks the fiscal health of every other group is affected downstream. So when a half billion dollars in “churn” disappears (along with a lot of other breeders and mares), everyone needs to sit up and think. In the simplest scheme of things, basic principles of economics suggest that making things better for the breeder makes things better for stallion owners, for boarding farms, sales companies, consignors and agents, vets, feed companies, transporters, farriers, industry publications and insurers.
Like us, breeders in America are the foundation of the revenue pyramid, and the bulk of them, like us, are producers who depend upon the income of their farms to sustain themselves. Quite clearly, neither breeders in America nor anywhere else, can continue to sustain the losses they’ve had to bear in the last four years. In order to understand this, there were those who thought that the Keeneland September sale was a “good” one with a gross of $219million. Yet in 1999, the gross for the same sale was $233million, which converts roughly into $322million in today’s dollars. In order to achieve 1999’s result in 2013, breeders would have to see an increase of 40% to get back to where they were 13 years ago. What differentiates today from 1999 though, is the magnitude of cumulative losses breeders have suffered in the US, and are having to carry forward. Somewhere, surely, there is a tipping point where resilience gives way to debilitating weakness.
There is only one choice, and that is to acknowledge the crisis and to respond to the financial landscape by finding new ways to do business. There is little comfort in knowing these lessons apply mainly to markets far away from us. We are not so far removed that we are immune, and if we keep doing what we’re doing ourselves, sooner or later we’re going to get what the Americans are getting. In the end, remember what Charles Darwin had to say on the topic: “It’s not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”
The one hot topic that appears to top most slates in the United States, is the subject of stud fees. Those of you that study these columns, will know that for many years now, we’ve been encouraging our colleagues in the stallion business not to out-price the market. In the end, there are just 6 or 7 entities that control the tight number of commercial stallions in this country, and quite clearly a re-alignment of stud fees would help in keeping breeders afloat. The conundrum lies in the fact that most semen sellers are unable to drop their prices much, because we overpaid for our stallion corps in the first place, and we’re all stuck trying to protect or recoup our investments. The other thing is our fiduciary responsibilities to shareholders, which, like shareholders wherever they are, create upward pressure on the need to maintain dividends. All of these are understandable fundamentals of the economic cycle.
The limited number of stallions commanding commercial lustre or “bling” and the fact that in tough times people seek sanctuary in the tried and tested, does not help in solving the problem. In the context of stallions, horsemen appear to have an hereditary obsession with the proven horse, at the expense of all else. When you recall that Northern Guest and Foveros, Jet Master, Western Winter and Fort Wood, all had first crops, and those with a sense of adventure were the ones who cashed in, it’s difficult the grasp the concept of a singular concentration on a handful of elder statesmen, particularly in a business where we know that fashion switches from pinstripes to polka dots in a matter of months, and the older brigade inevitably lose their appeal. It even happened to Sadler’s Wells, remember, and the first signs are when mares carrying to the cover of an aging icon, fetch less than the cost of the service.
Somehow, we have to revive the memory in the minds of those that make up our market, that there is enterprise in identifying the rising freshman. That way, breeders will find a new enthusiasm for the new arrival, and that in itself will take some pressure off the established sires. The longer view of how the world will be in 2015, when the consequences of our choice of stallions this past season will become known, must surely suggest that by then we will be back on our feet. The attributes that have seen this country create more great companies than any other of its size, courage, enterprise and the pioneering spirit, will deliver up a new generation of investors with a fresh sense of where the world is headed. Those who rely more on memory than vision, are driving in the rear-view mirror.
A review of the stallion business worldwide reveals that the bulk of the best commercial stallions are held by just a few individuals or entities. They do not operate in what one might term as a genuinely free market, where widespread competition naturally creates downward pressure on fees. For want of another name, you might call it an oligopoly, a market condition that exists where there are fewer sellers. In this environment, prices generally trend upwards, because it is normally associated with a situation where demand exceeds supply, and buyers have to have the product. In this situation, whatever the long-term consequences, stallion fees are inclined to be set as high as possible, simply because those of us that control them, can.
In the context of what’s happened in America in recent years, while that may provide a better result in the short term, it can’t be smart in the long term, because in the end, it destroys your customer base. Nobody foresaw the 2008 collapse of international financial markets, and nobody anticipated the implosion of the American Thoroughbred market, nor the impact it would have on markets worldwide. The fact that there are still many breeders in business, including smaller operators, says something for their personal fortitude, though it doesn’t say much necessarily for what’s left in their kitties. And while there is some comfort in reminding ourselves that it has not been as bad in South Africa as it has been in many countries abroad, the fact is, many of our colleagues are struggling, particularly the smaller ones, and they in the end, are the bedrock of the breeding community. In the more than 30 years that we’ve been in business, we’ve seen more stud farms go than come, and increasingly, the power of production is concentrated in fewer hands. Whilst rationalisation is an imperative consequence of any downturn in any market, ours is an especially precarious one, and the balance between the number of horses we need to sustain our racing industry and the number that will fail to sustain it, is perched on a thin red line.
If you haven’t already worked it out, we guess it’s time for us to say it. Once upon a time, stallion contracts here and abroad, were universally “90 days in foal”, and the fee became payable. Then the Northern Hemisphere countries introduced a scheme whereby payment was made on the 1st September (March in our language) in the year in which the mare was bred (ie. within two or three months of the breeding season, but before the foal materialised), on the understanding that if you made timeous payment, you got a live foal guarantee. As we mentioned in a previous article, Summerhill revolutionised this concept by introducing a : “no payment” deal until the foal itself was on the ground, standing and nursing. Yet those in a position to do so saw the standard formats morph into various other forms of payment, including “upfront, no guarantee” (for the likes of Northern Dancer, Nijinsky, Danzig, Mr Prospector etc.), “live foal payable within 30 days of foaling”, then “out of sales proceeds”, and then finally, “out of proceeds with forgiveness”. With forgiveness means that, where the resultant progeny fails to make the value of the stud fee, the stallion owner receives all proceeds, whatever they may be, and simply lets the customer off for the balance. While that may relieve the broodmare owner of the liability of having to pay the full fee, it doesn’t detract from the fact that he’s saddled with whatever his other production costs are, including the keep and maintenance of the mare and yearling to that point.
As we pointed out a while back, the broodmare owner has to carry the accumulated costs of production for three consecutive foals before the first gets to the market, which means that if you have a broodmare band of even say, 10 mares, you need a small fortune in operating capital in order to fund your business, a commitment which is on-going for as long as you are in business. The risk to the broodmare owner is magnified because he and the stallion owner do not share the same timetable. Stallion owners operate annually from the 1st September to the 15th January (in Southern Hemisphere parlance), while breeders are effectively, as we’ve said, on a two and a half year calendar from the time they breed the mare to the time the yearling makes the auction, and even longer if you’re attending a later sale. In a world where lots can happen in a day, having to spin the wheel for two and a half years, particularly when the market is battling, can be daunting.
Another way stallion owners can help, and especially in South Africa where we have a relatively small market, is to limit the number of mares their stallions serve. That way, the broodmare owner has a bigger chance of recovering his expenses and in the end, because it has to be the object of the exercise, of generating a profit. By making the commodity scarcer, we improve the level of demand, and we also ensure a spread in the patronage of a broader base of stallions. In the Northern Hemisphere, where stallion books long ago soared past the 100 mark and are now, incredibly, surpassing the 200 level, breeders are not only regularly compromised in getting their mares covered by a stallion because of congestion in the line-up, but they’re also putting themselves at the mercy of an over-crowded yearling market, when that time comes.
We have thought long and hard about these issues at Summerhill, and we’re wondering whether there isn’t another and a better way to extend the life expectancy of a breeder. Perhaps the answer lies in a combination of the terms we offer and an element of relief where the yearling does not cover the value of the stud fee (provided of course that the breeder has given the horse every chance to be what it can be). There are many ways of skinning this cat, and we need to put our thinking caps on before we find ourselves in similar straits to our colleagues in the United States and elsewhere in the Northern Hemisphere.