Keenland Sale

[covelj70]

This board spends alot of time lamenting how terrible things are in the industry and highlighting all of the downward trends.

There are definitely significant and real deep seated issues that need to be fixed and I in no way mean to minimize those issues in this post.

However, just in the spirit of balance, it\'s worthy of note how strong the Keenland yearling sale has been.

The strength relative to last year has surprised alot of people in the industry.

I believe this speaks to what can happen when we cut supply a bit (i.e. decrease in live foals each of the last few years).  Supply/demand tightens up, prices go higher, commercial breeders can make a little bit of money, owners get a quality physical.

I continue to believe alot (not all) of the long-term fix in this industry revolves around the idea that less is more.  Fewer foals (but better prices for breeders), fewer racing days (but bigger fields and in turn more wagering on those bigger fields), fewer tracks to consolidate the fewer horses, etc.

Again, there are other issues that need to be addressed as well but I think the \"less is more\" concept can fix alot of things in this game and it has clearly helped on the sale front.

[Boscar Obarra]

Figure they\'d rather buy a few horses and enjoy themselves then earn < 1% in the bank. Hell, the bank may not even be there when they go for the cash.

[TGJB]

Jim-- you\'re going to have to explain to me how the the price of horses going up, meaning expenses are going up, is good for OUR industry, as opposed to for the one that produces things used by our industry.

[Frank]

I\'m surprised it took this long to get your response. How is paying more for our product, the racehorse, supposed to be good for our industry, which I\'m assuming is racing?

Frank

[covelj70]

I\'m not sure why this is so hard to understand.  

I own shares in several stallions so when people pay more for yearlings that, in theory, makes my stallion shares more valuable.

If I intend to sell the horses I breed (i.e. commercial breeder), then people paying more money for yearlings is a good thing

If I own a horse on the track that someone wants to buy to turn into a stallion or a broodmare (which I have done this year), the fact that people are willing to pay more for yearlings that that stallion and/or broodmare produce is a good thing so, in theory, my horses are on the track are worth more.

Doesn\'t seem that complicated to me.  I didn\'t say that the yearling sale being relatively healthy was a cure to all of the industry ills.  I simply said it\'s not all the gloom and doom in this industry that we see almost everyday on this board.

[Frank]

It\'s very easy to understand if by \'this industry\' you are referring to the breeding industry. If it\'s racehorse ownership that you\'re referring to then rising yearlings prices is terrible news. Owners, who collectively lose astronomical amounts of money, would be much better served by continued declining sales results and lower stud fees.

Frank

[sighthound]

One thing that needs to be mentioned is that the elimination of several hundred \"bottom end\" horses is a good thing for the breed.  When you breed more horses (or pigs, or cattle, or chickens) you don\'t hold a certain percentage of \"exceptional\", you simply end up breeding a greater percentage of poor animals as the absolute numbers increase.

Eliminating those poor animals has caused the money to be more spread around among higher quality stock.  I also noticed that there are not one or two multi-million dollar horses, there are several million-dollar ones.  That\'s good, too, to spread the money around.  The average price for all stock has increased.  All good.

Frank, the expense of racing a horse is about the same whether it\'s $20,000 claimer or a Grade One horse - about $40,000 a year (yes, you have increased travel expenses and/or nomination fees with better stock, granted)

That the stock is worth more at the beginning, and end, of their racing careers, is a good thing.    

I think what you are concerned about is can purses pay for this increase in stock prices?  Will purses make racing viable for owners when the price of racing stock increases?  Or will more stock leave racing for the breeding business?

[TGJB]

Let me start by saying that Frank has raced, bought, and bred lots of horses, and makes his living in this game. He understands the economics quite well.

The bottom line is, if you sell horses, the market being up is good for you. If you buy them-- as most who race them do-- it can\'t be good. There can be specific situations that come up (like the ones Jim describes) where it can break for you if a you\'re a buyer that becomes a seller. But on balance it has to be a negative.

[Boscar Obarra]

Higher prices are always better for the seller. Nothing new there.

 And as an aside , small fields have been a godsend for owners, though its rarely spoken of as a good thing.

 I thing Jim\'s point was that there is still substantial interest in racehorse ownership, despite the impediments.

[sighthound]

I think the horses at this sale have been more accurately valued, compared to last couple years.  Thoughts?

[Frank]

Strongly disagree. The global bottom line of horse owners would suggest that most yearlings are vastly overvalued.

[miff]

Risk factor on high priced yearlings off the charts, highest form of risk in gambling the racing game.Negative results/losses on high priced yearlings statistically staggering, hundreds of millions down the drain over years with a fair number not even breaking their maiden.

Frank and Sight both make valid points re historical and current market.

Mike

[covelj70]

Frank,

No doubt most horse owners lose ALOT of money which in itself would suggest that horses are greatly over valued.  No argument there.

However, a few points:

1) The tax incentives are outstanding.  Most people buying yearlings are doing it at 50 cents on the dollar because of the ability to write off 100% of the purchase price immediately. Dont\' know how long that law will last but that\'s the rule now and it makes a big difference in the horse P&L at the end of the year. That\'s a hue deal so if we really wanted to get the math right on the true cost, it\'s much less than what is paid at the sale

2) Most people buying $1m or even 500k yearlings don\'t care about earning a financial return on their \"investment\"  If you have that much money to spend on a horse, it\'s all funny money and earning a financial return on that money isn\'t your primary objective. It\'s no different than buying a 200k car.  Of course that\'s not good value but people who are doing that don\'t care about value in that trasaction.  

3) When we do the math of what is spent at a yearling sale vs. the purse money available, not only do we forget the tax issues I mentioned in point 1 but we also don\'t include the private sales money.  A 2 year old recently just \"traded\" for $1m for 50% of the horse after 1 race. Those owners obviously made a nice profit that won\'t show up in the yearling sales vs. purse money analysis. A more extreme example is that Majestic Warrior was sold for over $30m after his Hopeful win a few years ago.  There are many deals like the one for the 2 year old I mentioned.

I know there\'s a lot of puts and takes on the issue (and I know you are well aware of all of the issues above) but I think its worth highlighting these issues again in the spirit of balance against all of the negatives we hear everyday about the industry.

[sixmoreouts]

I think a crude global bottom line of horse owners would suggest that racehorse investment is comparable to buying lottery tickets--about a 50% return on investment.

[TGJB]

MUCH worse than 50%. Annual purses are roughly a billion, expenses for owners twice that-- and that doesn\'t count the cost of the horses. Owners lose more than 100 cents on the dollar as a group.

From an economic perspective, the best thing you can do with a bunch of yearlings you just bought is give them away or shoot them. (Yeah, I know, it\'s a JOKE).

Which makes it all the more amazing that my clients, as a group, have made money over about 250 horses.