Kentucky’s beleaguered Thoroughbred industry is starting to see improvement after several years of decline, with financial indicators in most segments of the industry finally pointing in the right direction.
Professionals in the breeding and sales sectors of the state’s signature industry see the early signs of financial recovery, although the racing industry is still facing challenges. The equine real estate market, meanwhile, got a shot in the arm when famed Calumet Farm changed hands for $36 million this spring – and even better, the new owners are committed not only to maintaining Thoroughbred breeding and racing operations but restoring the fortunes of this faded crown jewel with further investment.
Yearling sales, the industry’s initial financial litmus test of the year, are just getting under way for 2012. The first, conducted at Fasig-Tipton’s Lexington site in July, showed a healthy 15.1 percent increase in total sales dollars and 16.3 percent higher average. Overall receipts for the 189 auctioned in the one-day session were $15,364,000, which compares favorably to last year’s $13,349,000 total for 191 sold. The average price was $81,291, up from $69,890 in 2011; the median held steady at $60,000.
“We were very pleased with how the horses sold,” said Executive Vice President and COO Dan Pride. “There is always some trepidation going into the first yearling sale of the year, but overall there was a very positive vibe afterwards.”
Next up (after this issue went to press) was Fasig-Tipton’s sale at Saratoga, N.Y., then Keeneland’s mammoth September Yearling Sale, which will span 12 days and feature 3,604 yearlings.
“In terms of the yearling sales, I feel pretty good,” said Walt Robertson, Keeneland vice president of sales. “The (November) Mixed Sale last winter went well, as did the Two-Year-Olds In Training Sales this spring. People are willing to pay money for a nice horse. There are fewer horses available because we’re producing less. Over the last five or six years, we’re down about half in foal crop size.”
Jockey Club statistics show the number of Thoroughbred foals registered for racing eligibility in North America has been declining annually for most of the decade.
In 2011, approximately 27,000 foals were registered, a 10 percent decrease from 2010 and the largest single-year decline in recent years. Estimates for 2012 are another 8.5 percent drop to 24,700. The only recent year to show an increase was 2005, when 38,361 foals were registered.
Thoroughbred industry metrics and financials tend to lag several years behind overall economic trends, however, because of the time involved in breeding, gestation and training for each year’s crop.
The annual Report of Mares Bred, also complied by the Jockey Club, will be released this month and is expected to show lower numbers again also.
In 2009, there were 45,784 mares bred in the United States by 2,978 active Thoroughbred stallions. The next year’s figures saw mares bred decrease to 40,386 and stallions to 2,629. Totals slid further in 2011, to 35,304 mares bred and 2,095 servicing stallions.
Other states luring horses
While Kentucky by far remains the leader by number of resident mares, stallions and foals with more than five times more bloodstock than any one other state, there has been a steady stream of horses moving to other states such as New York that have enhanced racing purses and/or in-state breeder award incentives. Many increased their Thoroughbred monies specifically with alternative gaming revenues.
“In 2012, there were still about eight times as many Kentucky-bred foals as New York-bred foals. But that gap is going to close,” said Fasig-Tipton’s Pride.
“The advantage of a program like New York’s is that it’s a three-level equation,” he said. “In addition to enhanced purses, they have breeder and stallion owner awards. Sometimes it’s the same person, but most of the time there are three different people or groups that can benefit from that horse. The incentive to breed in a state like that is greater, and it’s also broader in its economic advantage.
“There are fewer mares being bred overall, and when a mare leaves Kentucky she’s not being replaced,” Pride continued. “There is the multiplier effect. For every mare that leaves, that’s one less van ride to the breeding farm, one less stop at the convenient store for gas for the van, less hay and feed being bought by the farm, one less horse
for the blacksmith to trim, one less mare that needs checked by a vet. The economic impact affects so many ancillary support industries.”
Kentucky’s breeder incentive program is different from other states, in large part because so many foals are bred specifically for the market.
“We produce quality, and it’s a commercial industry,” said David Switzer, executive director of the Kentucky Thoroughbred Association/Kentucky Thoroughbred Owners & Breeders. “Kentucky-bred horses race all over the world, and our program does not restrict those horses to racing only in state. The breeders receive awards no matter where the horse races. We also have purse supplements that award owners who race their Kentucky-sired, Kentucky-foaled horses in state.
“Our fund is more stable than others,” he added. “They built their business plan on casino money. The danger of that is it’s not permanent. When states are losing money, and all are, legislators start taking money back from those programs. That’s happening in Ontario, Pennsylvania, Indiana and West Virginia. It’s like someone hooked on oxycontin. What happens when you take the drug away? You feel a lot of pain.”
It takes three-plus years from conception until a foal is old enough to race, but the reduced Thoroughbreds production is already being felt at the racetrack.
Concerns about horse population and field size grow in the near term “because of a serious and ongoing reduction in the number of horses being produced at Kentucky farms and breeding facilities across North America,” said Churchill Downs President Kevin Flanery.
The 2012 crop total reflects a drop of nearly 10,000 foals over a five-year period.
“If production continues at its current rate of average declines of more than 8 percent over the past five years, what will the available horse population in Kentucky and other racing states look like five years down the road? Where will those horses come from?” he asked.
There are concerted efforts elsewhere. As foal crops dwindle, efforts by other racing states to lure horses from Kentucky continue to grow, Flanery said. The Bluegrass state does not have the same incentive tools as New York, Indiana, West Virginia, Louisiana, Pennsylvania and, very soon, Ohio, to fund its purses and breeding programs and remain competitive.
“Until this is addressed, the major issues for Churchill Downs and other Kentucky tracks will continue to be the increasing competitive pressure from slot-fueled purses in competing racing states and the ongoing flow of Kentucky horses to those states,” he said.
It is encouraging that the breeding and sales segments of Kentucky’s horse industry appear to be stabilizing after a period of difficulty, Flanery said, but “the landscape for racetracks continues to be challenging.”
A ripple effect
The reduction in foal crop also impacts the sales companies.
“We’re down 15 percent in yearlings to be sold in September,” said Keeneland’s Robertson. “Last year, we had just over 4,000.”
The industry went through a similar correction in the mid-1980s, said Case Clay, president of Three Chimneys Farm in Midway, owned by his parents Robert and Blythe Clay.
“I was in the fifth grade,” Clay said. “But by talking to folks who were active in the business then, like my father and his contemporaries, they said 2009-2010 was worse than the 1980s.”
Clay holds a degree in economics and worked in the corporate world with the Hyatt Corp., Ernst & Young, and Arlington Park. That experience has been “helpful, especially in a difficult economy,” he said. “The past couple of years have provided an invaluable learning experience.
“Last year, it felt like our market had hit the bottom. We now have a bit of historical data – the 2011 auctions were better than they were in 2010. I’m guessing this year will be similar to last,” Clay said. “The real barometer is the Keeneland September Sale. As long as the demand remains the same, we’ll be OK. A lot of the supply is now gone, so prices have gone up.”
“It generally takes this industry four or five years to get back from the start of a downturn or recession,” Switzer said. “When you look back at last fall, that’s when things started turning around. American buyers are coming back into the market, which is encouraging. We were getting away from our supply and demand curve, but that’s evening out now.”
Others agree.
There are significant signs that the U.S. auction market has stabilized or begun to gain ground, mostly because the lower supply is more in line with demand for horses, said Glenye Cain Oakford, the Daily Racing Form’s bloodstock business correspondent since 1999 and author of “The Home Run Horse.”
“That is a good thing, but to really thrive in coming years, I think the market also has to attract more new investment,” she said. “We’re seeing some of that, but it’s too early yet to call it a trend. In the meantime, buyers say they’re not finding bargains and that the good bloodstock they want – at whatever level – is harder to buy than it was two years ago.
Sellers seem more optimistic and secure, she said. They don’t have a “fire sale” mentality and appear more willing to hold on to stock if the market doesn’t meet their expectations.
“That’s a sign they’re more confident in the industry’s immediate future,” Oakford said.
Financing for equine ventures virtually dried up two years ago with the recession, and was aggravated when PNC Bank ceased equine lending after its 2008 purchase of National City, which had been the largest lender servicing the equine industry. Access to credit now seems to be improving.
“You’re starting to see some banks sending their sales guys out. You didn’t see that in 2009 and 2010,” Clay said.
“It is easing up slightly,” Switzer said. “But the lending business for everybody is tough. Fifth Third (Bank) has eased back in a bit, and PBI has taken an active role, but everybody is being very selective. I think since we have probably hit the bottom and then saw encouraging signs last fall (at the sales) that it’s easier to value the animals. But it’s going to take a while before we get back to what we consider normal.”
Thoroughbred operations are better businesses in general today.
Tight credit remains a worry among those breeders who survived the recent financial crisis, Oakford said.
“That flushed many right out of the business, and so far I haven’t seen much evidence that they are returning,” she said. “In addition to facing tighter credit, many breeders still in the game remain intensely practical and conservative in their spending.”
Back to ‘splendor’
Real estate has been another stagnant segment of the equine market, but like bloodstock, it is showing signs of rebirth. The prime example is storied Calumet Farm outside Lexington, which was purchased by the Calumet Investment Group Trust. The farm, improvements and its famed red and blue silks have all been leased to businessman Brad Kelley, who owns Hurricane Hall and Bluegrass Hall farms. The Associated Press reported a sale price of nearly $36 million for the 799-acre property.
Louisville attorney Charlie Middleton, trustee for the private group, said Calumet will remain a horse farm.
“It’s not going to be a subdivision or industrial park,” Middleton said. “This is one of the most historic farms in the industry, and we’re going to do our best to bring it back to its splendor.
“We first started looking at it in 2004 and 2005 after Mr. de Kwiatkowski’s death, but the family wasn’t interested in selling then. That changed earlier this year,” he said. “Mr. Kelley has almost 100 mares, and we’ll be moving those at Bluegrass Hall shortly. He’s going to consolidate everything at Calumet. We’re going to be aggressive and invest a lot of money to restore the main house and the ambience. Hopefully, the racing operation will return it to its heyday.”
Tom Biederman, owner, broker and principal auctioneer of Biederman Real Estate and Auctioneers, said the equine real estate market is very similar to the auction ring.
“Just like with horses, the very, very nice yearlings and broodmares get a lot of attention. So do the very, very nice properties,” Biederman said. “Our business slowed down, but it didn’t come to a screeching halt. It became harder to get the amount of money you were expecting for a property, and harder to get buyers to spend confidently, but real estate still moves.”
Real estate brokers were hopeful the international attention central Kentucky received during the 2010 World Equestrian Games would spark sales.
“We all did a lot of advertising. I think people looked at ads but weren’t ready to buy at that time. The market moves slower than anyone hopes,” Biederman said.
“Things are picking up though. Last year, we had $40 million in sales, and we’re on pace to do that again this year,” he said. “We sold Clovelly Farm for $11.5 million and Ardmore Stud in Woodford County for $4.9 million late last year. The time frame from October through December has traditionally been strong because it’s before a new breeding season.”
Anne Charles Doolin is a correspondent for The Lane Report. She can be reached at [email protected].
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