Auction income of commercial breeders will fall dramatically this year in a difficult marketplace

Compared to the previous two years, 2001 has not been a good year for Thoroughbred auctions. But how much is the market really down and what does it mean for the commercial breeding industry?

As shown in Table 1, which compares several market measures in 2001 to the same statistics in '00 for the four main market segments and the market as a whole, the most striking and perhaps most important decline has been in the total income from Thoroughbred sales in North America. It should be noted that the totals line includes horses of racing age, stallion shares, and other horses that do not fit in any of the four main categories.

With only four more sales of significant size remaining in 2001, total receipts from all Thoroughbreds sold in North America this year have declined 23.1%. Those four sales last year added an additional $7.2-million to the total, so if they follow the same trends as other 2001 sales, breeders can expect that, by the end of the year, total receipts for North American sales in '01 will reach about $843-million.

Thus, what was a $1-billion marketplace for the first time in 2000 slid well below that mark this year, leaving a $248-million hole in the pockets of commercial breeders.

Since those same commercial breeders paid the highest average stud fee in two decades this year, there can be no doubt that the combination of reduced current income and increased current expenses in terms of stud fees will squeeze those breeders who depend on the industry for their primary income. That vise may screw even a little tighter next year when more effects of mare reproductive loss syndrome (MRLS) hit the marketplace.

About half of the $248-million decline in total receipts can be explained by the fact that about 10% fewer horses will have been offered for auction by the end of 2001 than in '00. Overall average price for Thoroughbreds has declined about 8.2%, accounting for another big chunk of the decline in income. The final factor is the 15.6% increase in buy-back rate that will combine with the lower number of horses on offer to decrease the total number sold by about 15%.

The market took solace early in the year, particularly at the summer sales of selected yearlings, by surprising advances in average price, but it is now clear that the only reason average went up was that demand for that particular type of horse outpaced supply. That was not true for the rest of the market.

The yearling segment of the marketplace-about half of the total market-is the only market slice where the interaction of levels of supply and demand combined to maintain average price at the record levels set in 2000. Clearance rate, however, fell drastically from 78.5% (reflected in the 21.5% RNA rate last year) to only 70.5% this year. The aftermarket was active at yearling sales this year, but commercial breeders rarely make money on yearlings sold in the aftermarket.

For breeders, the aftermarket is mostly about minimizing losses.

Understandably, the broodmare segment of the marketplace was hit hardest this year. Total income from sales of broodmares should end up at around $190-million, almost 40% less than the $316.9-million recorded in broodmare sales last year. Average price for a broodmare will also be down around 25%.

MRLS is partly to blame for this decline, along with the lack of a major dispersal at the Keeneland November sale, the effects of the September 11 terrorist attacks, and the general economic slowdown. The vast majority of broodmares are sold during the last three months of the year when all of these negatives piled on top of each other force demand down, but, lest we forget, average price also declined 33.1% at the 2000 Keeneland January sale.

Top to bottom

Interestingly enough, the decline in average price for Thoroughbreds in 2001 was fairly uniform from the top to the bottom of the market, as shown in Table 2. Throughout the year, conventional wisdom trumpeted that the top of the market was relatively stable, while lower echelons were declining more drastically.

For the market as a whole, that simply has not been true. Average price for the 1,775 most-expensive horses sold-the top 10% of the market-declined 8.4%, slightly more than the market as a whole. The lowest 30% of the market in fact did best according to average, with more modest declines and an actual 7.1% rise for the least expensive 10%.

Balanced against all these numbers are the convictions of buyers that top horses were more difficult to buy than ever and the surprise of sellers that their most popular offerings brought a much higher price than expected.

The key to the contradictions apparent between perceptions and reality lies in the combination of buyer perceptions of market direction and their ever-increasing selectivity. As consignor and buyer John Sikura pointed out at the Keeneland November sale, buyers approached that sale with the idea that the market was bound to be down and therefore they should be able to find bargains.

What they failed to anticipate was that everyone else had the same idea and, since most buyers have similar criteria in selecting horses, everyone picked out the same supposed bargains, forcing them to sell at a premium rather than at a bargain price.

In other words, buyers tried to change their target without changing their selection criteria. Goodbye, bargains.

The good news for the commercial market is that, though 2001 cannot match '00 or 1999, total sales for '01 will exceed total sales in '98-just three years ago-by about $35-million. It is all too easy to forget that the $808-million in sales in 1998 was an all-time record total at the time.

Yes, there are problems in the Thoroughbred marketplace, stud fees being the most significant one. Still, the level of trade remains close to the all-time highs set during the last two years.

The unanswerable question is, what direction will the market take in 2002? Like the broader world, the Thoroughbred marketplace has a short-term problem. Until the situation in Afghanistan stabilizes and fears of further terrorist attacks recede, the economy is unlikely to rebound significantly. Coupled with the effects of MRLS, which are bound to be much more severe during the next two years, those economic factors make it unlikely that market receipts will maintain even 2001 levels.

Curiously enough, given that the market's major problems are short term, buyers appeared to be adopting a longer-term strategy in November, heavily discounting older mares and paying a premium for younger mares and the few interesting weanlings on offer.

The Thoroughbred marketplace has never been a particularly rational place. There is no reason for that to change now.