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August 1, 2011
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Equine Market Looks for Balance

Battered Kentucky Thoroughbred industry sees hints of daylight around the sales barn

By Anne Charles Doolin

Hammered on all sides since 2008, professionals in Kentucky’s signature Thoroughbred industry are allowing themselves a cautious sigh of relief after 2011’s first major yearling sale. Now, entering the height of the yearling sales season, all eyes are on the numbers.

There was no champagne and confetti, but last month’s Fasig-Tipton Select Yearling Sale in Lexington did show some encouraging indicators. The median price was 20 percent higher than in 2010, and the buy-back rate dropped substantially. Not all metrics were on the positive side, though. The average price dropped 7.8 percent and gross revenue was down 27.5, the latter mostly a reflecting a 25.5 percent decrease in the number of yearlings offered.

The Bluegrass’ Thoroughbred industry has been pummeled by the deep recession, plummeting public auction prices, lines of credit drying up, drastically reduced stud fees and fewer horses being bred.

Veteran analysts, however, think this summer’s Fasig-Tipton sale results suggest a market bottom finally has been found. Next month’s Keeneland sale, whose volume is much larger, will confirm or contradict horsemen’s hopes.

Public auction figures, though, are just one barometer by which to judge the health of the Thoroughbred industry. Others include stud fee averages; numbers of foals registered; racing days and purses; and money wagered on racing.

Myriad expenses will also factor into whether a sales yearling shows a profit or loss when the auctioneer’s gavel falls – costs include the stud fee, board and care for the mare while in foal, transportation, veterinary bills, shoeing, sales prep, agent fees and more.

Further complicating matters for horsemen, qualification terms for equine business financing have gotten tougher.

Lenders enter tight equine finance field

“Banks in all aspects and in all industries, not just equine, have certainly tightened up their lending policies,” said David Switzer, executive director of the Kentucky Thoroughbred Association, and Kentucky Owners and Breeders Association (KTA/KTOB). “Since this time last year, however, two new banks have started lending to the equine industry, (Louisville-based) PBI and Huntington Banks, so that is a good sign.”

Bob Feenick, senior vice president at PBI Bank in Lexington, has been active in equine lending nearly 30 years. He was with the former National City Bank when that Cleveland-based institution was the largest servicing the Thoroughbred industry. PNC Bank of Pittsburgh acquired National City during the 2008 financial crisis, however, and upon completing the takeover in 2009 ceased equine lending. The result was a gaping void of available equine financing.

“The cash flow in the Thoroughbred industry has been going backward for quite awhile now, and the margins were disappearing,” Feenick said. “This downturn looked very familiar. It felt like the late 1980s, but frankly I believe in many ways that the ’80s downturn was worse than this one.

“I follow the data closely, and cyclically (the past year) was a good time for PBI to wade in, cautiously,” Feenick said. “This is a Kentucky-based bank, and we realize how important the equine business is to this state. “
Boyd Browning, Fasig-Tipton president and CEO, follows the numbers, but also his instinct.

“I’m a CPA and was in public accounting for years,” Browing said. “But I judge a sale more on its overall feel than numbers. I trust the feedback we get from customers, both buyers and sellers.

“A couple of days after this (year’s) sale, after digesting everything, I think we have found the bottom of the marketplace. I’m encouraged and feeling more positive,” he said. “We had more people here looking than we did the year before, which is always a good sign. I do think buyers are showing more restraint and discipline in what they’re going to spend. It’s good for them, but not always so good for sellers and the auction house.”

PBI’s Feenick said he was pleased to see an improved relationship between average ($69,890) and median ($60,000) prices at the Fasig-Tipton sale. At the 2010 sales, yearlings averaged $75,780 with a $50,000 median. The median shifted from 65 percent of the average last year to 85 percent this year.

“The closer the median is to the average, the stronger the market,” he said. “When they are far apart, you have a few (horses) bringing a lot of money, and many that aren’t bringing anything.  When you look back at yearling sale numbers over the past 30 years, when the number (of animals) selling is high, the distance between median and average gets wide. When you have an oversupply, it’s not as solid a market.”

Deirdre B. Biles, who has covered horse sales for The Bloodhorse magazine for more than two decades, said she thinks industry operations are moving toward a balance.

Economy still rocking supply and demand
“The overall hope is that the supply will get more in line with the demand,” Biles said. “I think we’re bumping along at the bottom right now. This year’s yearlings offer breeders a chance to make a little more money, just a little, since the stud fees for these yearlings were already reduced.”

“I think we’ll continue to see mixed messages at the sales, since we’re getting mixed messages about the general economy, too. But it’s better than going backwards. Now, people are used to the market. We’re not seeing huge plunges and, barring some great economic catastrophe, the (Thoroughbred operations) that have survived this far are probably going to make it.”

Keeneland sale tests all levels
Looking forward to Keeneland’s mammoth September sale, Keeneland’s President and CEO Nick Nicholson said the sheer size of the sale really sets it apart from others around the country.

“Our September sale is the first time the market is tested at all levels,” he said. “We sell at the top, at the top of the top, in the middle, at the bottom and at the very bottom. I don’t think any other sale provides an industry barometer like this sale.

“It’s a fascinating sale,” Nicholson said. “It contains all these macro-elements, with all kinds of subplots under the macro umbrella. It’s impacted by the state of the general economy and the state of racing. And you can’t forget that horses are a crop, like tobacco or berries. Some years Mother Nature produces better crops that others.”

One factor that has helped the sales industry maintain some sense of stability is the width and breadth of foreign buying. Both Keeneland and Fasig-Tipton have actively worked the international market in recent years.

International buyers active in Kentucky

“Last year, Keeneland sold horses to buyers from 49 different countries – the year before that to 40,” said Walt Robertson, vice president of sales at Keeneland. “International commerce of all types is increasing at a faster pace than ever before. We’re getting people from all points around the world, not just the traditional buyers from Canada and Europe.”

Keeneland’s active recruitment of foreign buyers has been ongoing for the past five years.

“Traditionally, the newer buyers start at the lower end of the market, and then step up to better quality horses after they start having success with those horses in their home country,” said Robertson. “We have (sales marketing associate) Chauncey Morris travelling the world trying to convince people to come here to buy horses. It’s a lot of work, and you have to turn over a lot of rocks.”

Fasig-Tipton’s Browning agrees.
“It’s a competitive world, so you better do all you can. We’ve added representatives in Europe, Australia, Japan, South America, the Middle East and Korea,” Browning said. “I think in every industry, it’s obvious the world is shrinking. We are seeing new people getting in, but more on the entry level. I think that’s indicative of the overall market and reflects the general economy. We’ve not seen major buyers emerge who can work a major influence.”

Nicholson said the influx of foreign buyers stretches well beyond the sales ring.

“They all need services – food, lodging and transportation. And once they’re here, they need a wide variety of horse services – insurance, vets, quarantine facilities, expert advice in import-export procedures. Outside of their actual purchases, the investment just spirals.”

Partnerships work the private side
Another segment of Kentucky’s Thoroughbred market showing signs of growth involves partnerships, syndicates and limited liability corporations. Dapple Bloodstock, based in Lexington, has weathered the downturn by its diversification, said Chairman Mike Akers.

The LLCs consist of numerous owners who buy into a package of several horses, be it for breeding, racing or pin-hooking (buying for resale), with a price range from the medium to high end of the market.

“We’ve had good returns” for investors, said Akers. “And we’re fortunate to have enough repeat clients that we don’t have to market ourselves and go after new ones.

“We buy from one segment of the market and sell to another,” he said. “We deal with the best quality we can, and we spread the risk. That’s one reason partnerships are attractive – you don’t have all your eggs in one basket. And often a person new to the business may not feel confident dealing with all the elements. This allows them to learn.”

A Dapple offering reads like a stock prospectus, focusing on tax benefits, asset protection and depreciation benefits. Since Dapple is active both buying and selling, Akers looks at the yearling sales from both sides.

“Stability is what we really need,” he said. “Nothing scary went on at Fasig-Tipton. It was very stable.”

Team Valor International, based in Versailles, put racing partnerships and LLCs in the national spotlight in May when its Animal Kingdom pulled off an upset to capture the Kentucky Derby.

“Partnerships and LLCs are a growing segment of the market,” said Barry Irwin, founder and CEO of Team Valor. “When we started in 1987, Dogwood Stable was the top dog, and there were a handful of others. Now there are literally hundreds of different groups. The whole point of partnerships is to spread the risk.”

Team Valor now has 250 clients, Irwin said.

Irwin buys the majority of his racing prospects privately rather than at auctions. Most of the horses are either in training or already racing. The private-sales sector for high-end horses is one market segment that hasn’t gone soft, he said.

“The Triple Crown races have become such a goal and such a destination. There are more people who want to buy that kind of horse,” Irwin said.

The public auctions sector is affected by other forces, though.

“I think the recession has had the most impact,” Irwin said. “It doesn’t appear that we’re just going to bounce out of it. The dedicated breeders are going to survive, and I think we’re going to see more people breed to race again rather than just to sell.”

Supplying the racetracks

Yearling sales exist first and foremost to supply owners and trainers with the horseflesh to fill races at tracks around the world. (See page 38 for world Thoroughbred racing facts.) In the past two decades, though, the North America foal crop has fallen from a high of 40,333 in 1990 to a low of an estimated 24,900 foals born this year.

Kevin Flanery, president of Churchill Downs Racetrack, said the Louisville facility is already feeling the effect.

“As a racetrack, we focus on what horses are available to run here, and how they are going to get here. The reality is that the supply is diminishing,” Flanery said. “For one thing, it’s a reflection of the sales market and fewer foals, and secondly, competition for horses has changed dramatically in the last 10 years. States that are able to supplement their purses from gaming and other incentives are attracting horses out of Kentucky.

“We’ve already reduced our dates,” he said. “Eliminating Wednesday cards reduced our race dates 20 percent in the (2010) spring meet. And as the foal crop diminishes, there will be fewer horses overall for all tracks to compete for.”

Flanery pointed at the success of Friday evening racing at Churchill as a successful example of promoting the product, driving attendance and wagering, which in turn fuels purse sizes and attracts the horses.

“We’ll keep trying new things,” he said, but those are to complement our core, which is racing. Kentucky has been at the forefront a long, long time. You give us the same tools as other states, and we win.”

Keeneland’s Nicholson occupies a unique position, running both a major auction house and a racetrack. With its brief three-week race meets in both spring and fall, and a very healthy purse account, Keeneland’s racehorse population is usually not a problem.

“In all fairness to other tracks, we’re pretty insulated with just 15 days a meet and $600,000 in purses a day,” he said. “The impact of a smaller foal crop is also a regional thing. In California, they’re so isolated that it becomes critical earlier.”

Will Kentucky remain horse capital?

Nicholson said he doesn’t really know what to expect when the September sales catalog’s 4,319 yearlings pass through the ring late next month.

“We do the best we can to set the stage,” he said. “We recruit buyers around the world, and we put on as a good a sale as we can. We know it’s so important to so many families in Central Kentucky.”

Fasig-Tipton’s Browning said while he thinks Kentucky’s longtime spot at the pinnacle of the Throughbred breeding industry isn’t in immediate danger, it would be wise to not take anything for granted.

“There’s not a lot of loyalty in this world we live in now,” Browning said. “People don’t care about what you did for them 25 years ago; they want to know what you can do for them today.

“I don’t think Kentucky’s place in the industry is in trouble today or tomorrow, but I’ve seen what happened to the Standardbred industry in this state. In 20 years, it’s had shocking decreases in the number of mares and stallions. Fasig-Tipton has been conducting sales in Texas for 20 years, and its breeding industry has been cannibalized by states with better breeding programs – especially Louisiana but also Oklahoma and New Mexico, who all have purses enhanced by expanded gaming.

“Kentucky is still viewed as the leader in the industry. It’s a great place to raise a horse, and the auxillary services here like vets, blacksmiths, feed companies and transportation are second to none,” Browning said. “It’s a great place to be in the horse business, but it’s not the only place.

“It’s a balancing act,” he said. “I think those of us in the Thoroughbred business in Kentucky are doing this state a disservice to assume this is always going to be the Horse Capital of the World.

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Lane Report Cover August 2011 In This Issue
Equine Market Looks for Balance
Battered Kentucky Thoroughbred industry sees hints of daylight around the sales barn
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