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Rough Ride

By Anne Charles Doolin

Kentucky’s Thoroughbred industry, mirroring global economics, is riding out a painful downturn. While there are glimmers of hope, experts agree that it will continue to be a bumpy ride in 2010, if not beyond.

The tight credit market has impacted the equine industry hard, with some banks bailing out of financing bloodstock altogether. Some owners and breeders have been forced to disperse their holdings, and most others have cut back their activity levels at sales and on breeding farms.

The health barometers of the industry are many: the numbers of stallions and mares they cover, farm cash receipts, public auction figures, money wagered on races, racing opportunities for owners, and other sources of monies including state-bred programs and incentive funds.

Every category has seen declines over the past year or more.

The credit crunch
The tightening of lending policies nationwide has been particularly painful here. Cincinnati-based Fifth Third Bank made headlines by recently calling in some $37 million in equine loans. It sued one leading owner/breeder for more than $34 million.

“Most equine lending originates in Lexington, and we’ve seen the last 12 to 18 months that most of them have changed their approach,” said Dan Pride, executive vice president and chief operating officer of Lexington-based Fasig-Tipton. “JP Morgan Chase and Fifth Third are the largest institutions lending to this industry, and they’re analyzing their approach. 2010 is going to be an interesting year to say the least.”

David Switzer, executive director of the Kentucky Thoroughbred Association and Kentucky Thoroughbred Owners & Breeders [KTA/KTOB], with some 1,000 members, said money available to the industry is drying up.

“In the local banking market in 2007, there was a billion (dollars) in loans out to the Thoroughbred industry; in 2008 it was reduced to $750 million. Today, it’s about $400 million. That’s more than half a billion used for working capital, purchase of horses and so on. The money is there, but the qualifications have gotten much, much tighter. It’s not just us – it’s all kinds of businesses – but it’s certainly affecting the signature industry in Kentucky.

“Banks are reassessing assets, and some are not taking horses as collateral at all,” Switzer said. “They’ll take the dirt – the land – but not the horses. For the ones that are, the value [of bloodstock] is down 35 percent, but we still have the same operating costs.

“Some banks are getting out of lending to the equine business altogether,” he said. “PNC will be 100 percent out as of next July, and when they took over National City (in 2008), they were No. 2 in equine lending. If you call Pittsburgh, PNC’s headquarters, you get, ‘Horse? How do you spell that?’ ”

Fred Solomon, spokesman for PNC Financial Services Group, said it is not his understanding that PNC is pulling out of the industry. The majority of PNC’s equine lending portfolio, he said, came from its acquisition of National City.
“I can tell you that we have mostly moved to PNC’s policies of risk management and credit,” Solomon said.

Agricultural Powerhouse
Horse sales and stud fees have been Kentucky’s leading agricultural product for a decade – accounting for a fifth to more than a quarter of the state’s total agricultural receipts. However, UK agricultural economists estimate that poultry will outrun equine as the leading product for 2009, with revenues at $930 million, while equine is expected to drop by a quarter to $750 million from $1.08 billion in 2008.

“Whoever would have thought that we were a poultry state?” said one of the forecast’s authors, Craig Infanger. “But that’s the meat people go to in a recession. Poultry is not nearly as volatile a product as equine.”

“I actually debated back and forth between $700 and $750 million,” said Kenny Burdine, who assigned the figure. “I think you’ll see further declines in stud fees. Hopefully, sales receipts will help offset that.”

One additional effect is a reduction in the Kentucky Breeders’ Incentive Fund, which comes from the 6 percent sales tax on stallion fees. Jamie Eads, director of incentives and development for the Kentucky Horse Racing Commission, said she expects the 2009 fund to be down 30 percent. The estimate for the Thoroughbred portion of the awards is $9.1 million, down from $15.2 million paid in 2008.

Breeding Activity
Kentucky’s role in the industry is so dominant that its status and that of the nation are inexorably linked. The Bluegrass produces nearly a third of the U.S. thoroughbred foals. On the racetrack, horses bred in Kentucky represented nearly twice the individual starters as those from any other state or province in 2008.

“When you look at the totality of what occurs in the U.S., Canada and Puerto Rico, Kentucky is the leading state across the rankings,” said Matt Iuliano, executive vice president and executive director of the industry registry, The Jockey Club.

“It’s very important to look at the trends in the state of Kentucky. You’ll find some going up, some down, but it’s tough to argue against the importance of Kentucky to the Thoroughbred industry. It’s a good barometer.”

The Jockey Club’s 2009 Report of Mares Bred in North America shows a 13.5 percent drop from 2008, as 45,317 mares were covered by 2,409 stallions last year. The number of active North American stallions also dropped by 8.9 percent.

Thoroughbred breeding activity in Kentucky traditionally sets the pace, the report noted. During 2009, Kentucky’s 307 stallions covered 19,059 mares – 42.1 percent of all of the mares reported bred in North America. But mares bred in Kentucky declined 10.6 percent against compared to 2008; the number of stallions in the state declined 3.5 percent.

“Any industry is subject to a host of uncertainties, and agriculture faces a different set than a lot of others,” said C. Jill Stowe, an assistant professor in agricultural economics at UK. “The market for Thoroughbred horses depends heavily on the general economic market, and when things go south the market for horses is greatly impacted. They are luxury goods, which is the first thing to go.

“I think the number of mares bred will fall again for 2010, and that the Thoroughbred industry will lag the general economic recovery by a couple of years. I think everyone wants to wait and make sure the recovery is real, especially since this recession involves the banking and investment industries.”

Nosedive at the auctions
North American public auction figures show an even steeper decline, which started in the last quarter of 2008. Fall yearling auction prices saw reductions of 16.7 percent in gross, 6.9 percent in average, and 16.7 percent in median from 2007 to 2008.

Last year, Keeneland’s 2009 yearling sales figures versus 2008 were even more alarming, as gross tumbled 41.5 percent from nearly $327 to just under $192 million; average fell 33.2 percent and median 40.5 percent for the 14-day session.

However, the Fasig-Tipton Kentucky October yearling sale bucked the trend to post increases of 9.1 percent in median and 5.7 percent in gross revenue [$7,471,900 to $7,895,400] during its three-day run. The average was up moderately as well.

“We were fortunate last year,” said Pride of Fasig-Tipton, which conducts sales in five states. “Our gross from 2007 to 2009 was down just 34 percent, which was not proportionate to the overall market.

“My gut feeling is that there is going to continue to be a widening gulf between our select sales and the lower level. We’re putting a lot of focus on our select events, hoping to capitalize on those and maintain the status quo on the others.”
Tom Thornbury, associate director of sales for Keeneland, said, “We certainly felt the impact of restricted available credit, particularly in the pinhooker market. They weren’t as involved as they have been in past years, and as a result, the number of available two-year-olds has contracted. I think it will impact all the in-training sales next year.

“We’ve actively pursued international buyers for the past 10 years,” he said. “[In 2008] international buyers bought 25 percent of our horses; in 2009 it increased to 33 percent. They came to the United States to buy nice horses at a good value. One place where we did see a strong domestic presence was at the top of the market for broodmares.”

Trouble on the track
The purpose of purchasing yearlings is to get them to the racetrack. Purses, the money paid to owners, are derived from a percentage of the pari-mutuel handle, money wagered both on track and through other outlets. According to the industry’s official database, Equibase Company [a Jockey Club/Thoroughbred Racing Associations of North America partnership], handle on U.S. races in 2008 declined over a billion dollars [7.2 percent] from 2007, when over $14.723 billion was wagered. That resulted in a decline of 1.3 percent in gross purses, from $1.175 billion in 2007 to $1.160 billion in 2008.

Economic indicators just released by Equibase show wagering on U.S. races continued the decline, 9.9 percent, from $13.669 billion in 2008 to $12.319 billion last year. Purses were down 5.6 percent during the same period, from $1.158 billion to $1.093 billion.

Also impacted as a result of reduced handle are state-bred programs, including the KTA/KTOB. Those development funds, designed to encourage people to breed and run in Kentucky, come from a percentage of monies wagered on-track and via intra-state wagering. Some $8.4 million was available to enrolled horses in 2005, but the fund has declined since. For 2009, the available money was slightly over $6 million.

The view from the trenches
Matt Koch, outgoing president of the 800-member Kentucky Farm Managers’ Club, co-owns and operates Shawhan Place in Paris. “The biggest sign of the times is that it seems everyone is cutting labor as hard as they can,” Koch said. “The second thing is people just aren’t breeding mares. They’re either taking them elsewhere to foal, or they’re just not breeding them this year.

“I think everyone is doing whatever they can to keep going. I’ve started breaking yearlings for the first time, and a lot of us are starting to haul our mares to the breeding shed ourselves instead of paying a van company. But people cutting back on labor and doing more things themselves is not helping the economy. It’s hurting the satellite industries.

“We’re starting to see some of the smaller operations simply shutting the doors,” Koch said. “I don’t know if they’re taking a break and will reopen in a couple of years or not, but right now, it’s just not reasonable for them to stay in business.”

Switzer said the ripple effect is felt all over.

“We’re seeing a reduction in stud fees between 30 and 50 percent, and the number of mares being bred drop, which is another hit to the stallion operations,” he said. “We’re seeing horses leaving for other states that have alternative gaming or other sources of incentives, so that’s lost board revenue for farms. For every four mares that leave the state, that’s one employee that loses a job.

“It takes three to four years for the breeding industry in general to recover. That’s because we have to plan so far out. One year you’re deciding on your breeding; you breed the mare the next, the foal arrives the next, and you go to market in the fourth year. We went through a similar cycle in the 1980s, but that was more a result of the loss of tax breaks. It took until the 1990s for the industry to get back to its previous level.”

Looking ahead
“There are glimmers of hope, both in the international and domestic market,” said Keeneland’s Thornbury. “If you’re looking for a crystal ball prediction, I think in coming years we’ll have a gradual return. The equine economy seems to mirror the general economy.”

Alex Waldrop, CEO of the National Thoroughbred Racing Association, said the final result may very well be a number of new owners and a rethinking of the product. “There has been a lot of debate about the health of this industry. A lot of people were criticizing that too many people were breeding to sell, not breeding to race,” he said. “Now we’re seeing breeders return to racing by necessity, and I think there’s more care put into the process. This may lead to the improvement in breeding stock that we’ve all been hoping for.”

Anne Charles Doolin is a correspondent for The Lane Report. You can reach her at [email protected]