Archive for the ‘Breeding’ Category

When I first moved to Kentucky in 1988, the breeding industry was in the midst of a serious economic slump, one that began in 1985 and didn’t end until 1992. The seven-year downturn was caused by a combination of overproduction (the number of North American foals born topped out at over 50,000 in the mid-1980s), overconfidence in the market, and federal tax reform that took away many of the incentives to own Thoroughbred breeding stock.

The big question at Thoroughbred auctions for several years in the late 1980s and early ‘90s was whether or not the market had hit bottom. It’s a question that really couldn’t be answered until the industry saw an uptick in business, and that didn’t happen until 1992. Then, as now, the first part of a down market was the toughest, because breeders were carrying production costs from a bull market into a sales environment that was anything but bullish.

If 2008 was a tough time for breeders, they’d better strap in for an even rougher ride in 2009. Yearlings were produced from 2007 stud fees, a breeding season that came on the heels of an all-time record year for the average price of weanlings, yearlings and 2-year-olds. In fact, the 2006 bloodstock market hit an all-time high for gross revenue, with more than $1.23 billion in North American sales.

Last year’s economic crisis didn’t really hit until September, though Wall Street had been jittery for months beforehand. Prices for 2-year-olds of 2008 were actually up slightly, and yearling average declined by just 6.9% (though median dipped more sharply, by 16.7%). The weanling and broodmare markets were hit harder, falling by 15.7% and 17.2%, respectively. Most breeders I’ve spoken with are bracing for declines in the yearling market of at least 20%, and some feel it could drop by as much as 40%.

With such dire predictions in the marketplace, it may sound foolish to suggest that 2009 could prove to be a very good year for people to breed their mares. Stud fees are down significantly, and terms for those fees have seldom been as flexible as they are today.

To quote Warren Buffett, the oracle of Omaha: “Be fearful when others are greedy, and be greedy when others are fearful.” I think it’s fair to say that many Thoroughbred breeders are fearful right now.

To that end, the best economic stimulus the breeding industry could have in 2009 is confidence among mare owners that the yearling market of 2011 will have rebounded from the anticipated slump of the upcoming year and, perhaps, 2010. The wild card, of course, is the overall state of the American economy, which even the most optimistic among us does not feel will turn around in the next 12 months.

Not breeding mares that have commercial value is not going to improve anyone’s economic standing, and will not help stimulate the industry to get out of this slump. Stallion farms have reduced fees and are working with breeders to get mares bred and stallion books filled. The breeding sheds are now open: sending your mares to be bred supports the industry in so many ways, from the vanning companies, feed companies, veterinary community, boarding farms and stallion farms, among others.

And yet despite this economic downturn, there is still much support for a good product, a conclusion we have reached due to the strong support of advertisers here at the Paulick Report. Of course, we’d like to recommend you support those stallion farms that have invested some of their advertising dollars at the Paulick Report: Airdrie Stud, Buck Pond Farm, Hill ‘n’ Dale Farms, Hopewell Farm, Spendthrift Farm, Walmac Farm and WinStar Farm. We appreciate each of those businesses, along with our other advertisers (eNicks, Fox Hill Farm, Kris S Bloodstock, Liberation Farm, M & M Thoroughbred Partners, North American Thoroughbred Trainer magazine, and Team Valor), and urge you to recognize and support them in any way possible for their part in contributing to the independent voice the Paulick Report has been bringing to the industry since June 2008.

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Bassett was talking about the emergence of what then were just a few floating casinos in Illinois and the possibility of additional boats in Indiana; 1994 was only the beginning of an era that has seen an unprecedented explosion in gambling in states from New Mexico to New York, from Florida to Louisiana, from Mississippi to West Virginia, and from Michigan to Pennsylvania.

So much has changed in 15 years that even Bassett’s wise, old head must be spinning. In fact, his successor at Keeneland, Nick Nicholson, is now one of the main proponents to get Kentucky’s gambling playing fields level with those of other states. The mythical armada surrounding Kentucky has grown to include a massive floating arsenal of riverboats carrying blackjack and craps tables, and hundreds of thousands of slot machines at land-based compounds.

I understand completely what Bassett was saying. He hated the thought Kentucky’s racing industry would have to cave in to the pressures created by the dominos falling around him in other states. Betting on a horse and throwing money into slot machines are two forms of gambling, to be sure, but one involves an intellectual challenge, an agriculture based business, and a beautiful sport that at times can capture the interest and imagination of an entire nation. The other is a mindless activity that is virtually guaranteed to separate the player from his money: gradually, tantalizingly, but, ultimately, relentlessly.

Sadly, I hate to admit, the former – pari-mutuel wagering on horses – must depend to some degree on the latter – Video Lottery Terminals or slot machines – to survive.

The debate has gone on long enough in Kentucky. Fifteen years! There probably isn’t a resident in Kentucky who can’t jump in his car and within two hours be feeding a slot machine in a neighboring state. Thousands of Kentuckians are doing just that, every day, and it’s costing the state hundreds of millions of dollars each year in lost revenue. Worse, it’s threatening the very future of Kentucky’s largest and most important industry: the Thoroughbred.

I wrote earlier this week that slots revenue may in the long run be fool’s gold in many states, and I stand by that statement. Any non-essential industry that relies on subsidies to exist is skating on thin ice, because those subsidies can very well be taken away with the slash of a legislator’s pen. The racing and breeding industries in most American states would have to be put into that “non-essential” category. But Kentucky is different. Take away the horse farms and the nearly 100,000 jobs they have created, and you will have a state plunged into a deep, deep economic recession. No other state is so dependent on this major agribusiness. Furthermore, Kentucky’s identity to the rest of the world is so tied to horses that it would forever be changed.

It’s therefore essential that legislators, from Ashland to Hopkinsville, from Paducah to Williamsburg, understand that the armada is no longer mythical, that the assault is ongoing, and that the battle is in serious danger of being lost.

This subject has been debated, not just in the halls of Frankfort and the breeding sheds of Central Kentucky, but on the national airwaves. On Wednesday of this week and next week, Steve Byk’s At the Races radio show on Sirius channel 126 (4-7 p.m. Eastern) is devoting the entire three hours to the issue, “Kentucky in Crisis.” Byk’s guests this week were John Sikura of Hill ‘n’ Dale farm, Kentucky state Sen. Damon Thayer, Eclipse Award-winning writer Billy Read and trainer Chuck Simon.

Click here to listen to Wednesday’s enlightening “Kentucky in Crisis” program.

I’ll be on next Wednesday’s program, following scheduled appearances by Greg Stumbo, the Kentucky House Speaker whose VLT legislation cleared a House committee yesterday, lobbyist Gene McLean and former Kentucky Gov. Brereton Jones, the owner of Airdrie Stud.

VLTs or slot machines cannot be racing’s salvation. The sport is failing, not just in Kentucky but throughout the United States, because it has failed to adequately address a number of serious challenges. The racing product needs attention, and its business model is broken both on a local and national level, and simply putting additional money into purses is not going to fix the product on its own. It will, however, give the industry an opportunity to invest in its own future, something it has not been able to do since the mythical armada transformed into a very real threat to the survival of Kentucky’s most important industry.

Copyright © 2009, The Paulick Report

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Willwerth’s first run-in with authorities came in 1997 when she pleaded guilty to a felony charge in Virginia’s Fauguier County for forging a public record (a certificate for an equine infectious anemia lab test for a pony she sold). Willwerth received a five-year suspended sentence and was placed on probation. Her license to practice veterinary medicine was also suspended by the Virginia Department of Health Professions.

Five years later, Willwerth was caught in another dishonest act after she registered as Pennsylvania-breds a dozen foals born in Virginia. For that, she was barred by the Jockey Club from registering any foals for two years and banned from registering future Pennsylvania-breds. Click here to read a press release about the incident from the Pennsylvania Horse Breeders Association.

Brogden didn’t say she or her mother were “young,” “stupid” or “naïve” as Rodriquez did in his public mea culpa for taking anabolic steroids to improve his performance and then lying about it. She said the mistakes that have tainted her mother’s name in some horse industry circles were simply “bad errors in judgment." She also hopes her reputation won’t be painted with the same brush.

Brogden had nothing to do with the forged EIA certificate in 1997. She was attending James Madison University at the time. But, having two equine veterinarians for parents and learning to ride at an early age, horses were in her blood, even when she was living in Washington, D.C., suburbs after college and the only horses she saw were in magazines. She moved to Kentucky in the winter of 2002 after a former boyfriend told her she could never love him as much as she loved horses.

When her mother got busted later that year for trying to misrepresent her Virginia foals as Pennsylvania-breds (this occurred, incidentally, before slot machines enriched Pennsylvania-bred breeders incentives), Carrie Brogden was trying to establish her own reputation at Machmer Hall in Kentucky. “I said, ‘We’ve got to be proactive and try to right this situation,’ so we went to everyone who had one of these foals and tried to clean up the mess,” Brogden told the Paulick Report. “We settled monetarily with the owners of every single foal.” Brogden also said her mother has paid the price for her errors in judgment.

Today, Machmer Hall has about 120 mares and 50 yearlings on its 360 acres. These are tough times for breeders, but Brogden and her husband are trying to make a go of it, and they have enjoyed some early success. “You only have your name once, and that name and reputation are very important,” she said. “I live my life wanting to be able to sleep every night.”

There is a Biblical expression about sons having to pay for the sins of the father. Let’s hope in the real world that daughters do not have to pay for the sins of the mother.

Copyright © 2009, The Paulick Report

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Those three interests have been butting heads increasingly as the market has weakened over the last year. Stallion farms and banks for years have put security liens on horses being sold, but now they have company from other businesses: veterinarians, boarding farms, feed companies, even tack shops. More people are fighting over fewer dollars, and some fear market conditions have not reached their low point. 

It’s impossible to say how many horses are sold with liens attached to them, either from banks or stallion farms. One auction house executive is certain it’s less than 50% of the horses that enter the ring. However, one stallion farm representative told the Paulick Report the farm has filed more liens in the past 12 months than ever before.

One of the perplexing questions about liens is, “Who gets paid first?” If a breeder owes $75,000 to a bank and $25,000 on a stud fee and only gets $20,000 when a horse sells, no one is going to get whole. How that money is divided up is the issue. Auction companies take an arm’s-length position, holding the money while telling the affected parties to negotiate a settlement and tell them who gets what.

A group of chief financial officers for Kentucky farms and many equine lenders met last year at Keeneland to discuss how to resolve credit issues when multiple liens are attached to a horse. “It’s getting very messy,” one farm representative said. “Everybody is filing liens now.”

The meeting was described as a good first step, with open dialogue and identification of the various issues. Nothing, however, was resolved.

Traditionally, banks and stallion farms have worked closely together to resolve these issues, but banks are no longer as flexible as they once were. “Historically, banks have recognized those (stud fee) liens, but the Uniform Commercial Code changed a few years ago and the basic rule in priority has to do with the first to file,” one banker said. “Lienholders like banks have filed some time ago, so it becomes problematic. It’s the bank’s money, or the bank shareholders’ money.”

Complicating the issue are new “pay from proceeds” agreements on stud fees whereby a breeder is not obligated to pay for the fee until after he sells the resulting foal, either as a weanling or yearling. More and more farms are making deals for breeders to pay stud fees from sale proceeds, even if those terms are not the farm’s advertised policy. When fees were due by Sept. 1 or Nov. 1 of year bred, or even when a foal stands and nurses, the stallion farms could withhold the stallion service certificate as its trump card if the stud fee wasn’t paid. That kept a foal from being registered with the Jockey Club or sold at auction.

Now, however, with pay from proceeds agreements, the stallion service certificate is released to the breeder so the foal can be registered and sold. By so doing, the stallion farms have lost their leverage to collect stud fees from some breeders, especially if the resulting sale is lower than the stud fee.

Those farms often have no idea whether or not other liens have been attached to a horse being sold. They can perfect a lien by filing the paperwork in the state where the horse’s primary owner resides, in part to determine if other formal liens have been filed and to determine priority. That can be difficult, too, since it isn’t always easy to identify who the majority or minority owners of a horse are.

“The horse business is tough to be a creditor in, because there is no title registry concerning who owns the horse,” one banker said. “The forensics of trying to find who owns a horse can be staggering. Pieces of them change hands all the time without any paperwork. Stallion farms allow someone to sign a contract even though that person may own no part of only a small part in a mare. The farms are conducting business without the kind of underwriting a bank would do.”

Some breeders would like to see an ownership registry, but that could stifle commerce if paperwork had to be filed with the registry every time a portion of a horse changed hands. Others have suggested the creation of a central clearinghouse for liens, so creditors have some idea whether liens have been filed against individuals, but that would have to be tied in with an ownership registry. “The Jockey Club is the natural party to do that,” one stallion farm representative said, “but they don’t want to get in the middle of this, and neither do the sale companies.”

Without any change in procedures, stallion farms are likely to be standing in line behind banks when foals produced through pay from proceeds agreements are sold.  “It will be a headache, and it’s going to be tougher if more people can’t pay all their debt,” said a banker. “We are looking at a market that is particularly weak, and you’d have to say the chances of people defaulting on loans is increasing. It will get worse."

“It would be less of a problem if you didn’t have pay out of proceeds,” he added, “but it’s a competitive market among the stallion farms, and it’s tough to put the toothpaste back in the tube.”

Copyright © 2009, The Paulick Report

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The most recent results, in fact, represent the strongest sentiment of any of the 40 polls we have conducted since just before the Breeders’ Cup World Championships in late October. (Click here to see archives of all the Daily Paulick Poll results.) We asked, “Does the National Thoroughbred Racing Association provide a strong central organization to move racing forward in the future?” The results have been stunning, with 94% saying “no” and only 6% answering “yes.”

Along those same lines, in early December we asked, “Are you confident the individuals in charge of the most prominent racing and breeding organizations in the United States are adequately addressing the problems the industry is currently facing?” That resulted in an 85% no confidence vote, with 10% saying they are confident in our industry leaders and 5% unsure.

One of the first projects that landed on my desk when I joined the Thoroughbred Times as managing editor in 1988 was a feature story on the Jockey Club, the organization historically entrusted with registering Thoroughbreds and being the keeper of the Stud Book. The article was accompanied by a lengthy mail-in survey of Thoroughbred Times readers. The story and the survey results were of great interest, for at the time I had no idea how broadly the Jockey Club reached across the entire industry and how unhappy rank and file breeders then were with the organization’s service, pricing and activities.

It should be noted that there was an agenda to the article. The Thoroughbred Times was then owned by Richard F. Broadbent, whose Bloodstock Research Information Services was facing new competition from a subsidiary of the Jockey Club. There were questions about whether a tax-exempt breed registry like the Jockey Club should create a subsidiary to compete with a private enterprise company like BRIS, which supplied statistical data to breeders, owners and various publications. A few years later, the Jockey Club helped form another for-profit company, Equibase, which competed with the Daily Racing Form to collect racing results (the Form eventually closed its track and field operations and became Equibase’s biggest customer). The Jockey Club has since started other for-profit businesses.

One of the things that struck me was the comparison between how the Jockey Club and the American Quarter Horse Association conduct their business. The Jockey Club is clearly a breed apart from its Quarter Horse counterpart. The AQHA, then and now, is a relatively transparent organization, one whose membership is open and whose leadership is democratically elected through regional and national elections. There is a board of directors, from which comes an executive committee and elected officers. The AQHA has term limits that prevent individuals from maintaining longstanding control of the organization. The AQHA web site publishes a great deal of information about its governance and membership rules, which can be read here.

By comparison, membership in the Jockey Club has always been by invitation only. Click here for an explanation about membership. It is "governed" by a rotating board of stewards, though that term is used loosely since the Jockey Club has been under the firm control of just two men since 1982, when Ogden Mills “Dinny” Phipps was named chairman and William S. Farish became vice chairman (pictured left). Click here to see the current list of Jockey Club members, stewards, and officers.

The AQHA is a huge organization that maintains the registration of more than five million Quarter Horses, with 135,000 registered in 2007 alone. There are nearly 350,000 AQHA members. According to Internal Revenue Service Form 990 for tax exempt organizations, the AQHA generated $54.4 million in revenue in the 2005-06 fiscal year, the most recent year available. At that time it had $73 million in total assets, including nearly $49 million in investment securities. Click here for the AQHA Form 990.

The AQHA, like the Jockey Club, maintains pedigree records, but also promotes the Quarter Horse breed through horse shows and publishes three magazines (the Quarter Horse Journal, the Quarter Horse Racing Journal, and America’s Horse) that had total circulation of over 400,000 in 2006.

The AQHA charges as little as $25 to register a Quarter Horse foal if done within seven months of birth. The organization is based in Amarillo, Texas, and its highest-paid officer, longtime executive vice president Billie G. Brewer, earned an annual salary of $424,928; treasurer Lee Callaway was paid $221,965 (both figures are from the IRS Form 990.) The two executive salaries represented 5.5% of the AQHA’s total payroll of $11,725,124.

In addition, the Jockey Club claimed that its subsidiaries generated over $25.7 million in income for 2006 ($13.7 million by TJC Holdings Inc. & Subsidiaries, which is engaged in information services and software solutions; $4.9 million by The Jockey Club Racing Services, for the collection of Thoroughbred racing data; and $7.1 million by The Jockey Club Technology Services, Inc., for its technology services). Click here for more information on those subsidiaries, which include shared ownership in the data collection company Equibase, and full ownership of TJCIS (The Jockey Club Information Systems  and data supplier Equineline), and InCompass Solutions, which provides software systems for racetracks.

The Jockey Club’s IRS Form 990 lists its annual Round Table Conference in Saratoga Springs, N.Y., publication of its Fact Book, and providing financial support to other industry organizations among reasons for its tax-exempt status, in addition to its breed-registry responsibilities.

The Jockey Club charges $200 to register a Thoroughbred foal, considerably higher than the AQHA’s fee. Its last increase was in 2000, when it was upped from $175. The Jockey Club, which for many years was known as the “New York Jockey Club,” relocated its registration department from New York to Kentucky in 1988. 

Its highest-paid officer is president Alan Marzelli  (pictured, left), who earned $672,796 in 2006, 58% more than the AQHA’s top executive. The Jockey Club has three executive vice presidents: James Gagliano, with a salary of $256,885; Daniel Fick, $243,546; and Laura Banllaro, $243,804. IRS Form 990 also lists but does not itemize another $542,776 in 2006 pension plan contributions for those officers. The salaries represented 39.1% of the Jockey Club’s total payroll of $3,626,092 (exclusive of its subsidiaries, each of which have its own executive staff and employees).

The Jockey Club’s 2006 tax return came to light recently when an entity called “CTBA Boardwatch” (which generally concerns itself with the inner workings of the California Thoroughbred Breeders Association) distributed IRS Form 990 to numerous individuals. A number of those people contacted the Paulick Report and were outraged over the salaries paid to Marzelli and his three executive vice presidents.

I don’t know the going rate of executive compensation for a tax-exempt company in New York, where three of the four Jockey Club officers are based (only Dan Fick, a former AQHA executive, is located in the Lexington offices of the Jockey Club). Perhaps those numbers are perfectly in line with other non-profits. I would imagine, though, that the going rate for an executive staff is higher in New York than it would be in Kentucky.

It does seem strange to me that the Jockey Club continues to maintain a nicely appointed office in the high-rent district of midtown Manhattan, on 52^nd Street just off Park Avenue. I doubt that it’s gotten many walk-in customers seeking to register their foals since the registration department was moved to Lexington more than 20 years ago. It is conveniently located near the headquarters of Bessemer Trust, the Phipps family-run wealth management firm whose offices are just a few blocks away on Fifth Avenue.

I asked Jockey Club communications officer Bob Curran why the Jockey Club continues to have a New York office 20 years after the organization’s primary function was relocated to Lexington. A few days later I received the following statement from Jockey Club president Marzelli: “Beginning in 1989, when the first of our commercial subsidiaries was incorporated, The Jockey Club has created and developed a group of for-profit subsidiaries and strategic partnerships, each designed to serve specific segments within the industry by utilizing highly efficient, state-of-the-art technology platforms. We have built and managed this growing list of technology-based companies with a corporate office based in New York and operations centers in Lexington, Ky., and Mountain View, Calif.”

That didn’t really answer the question “why a New York office is necessary” although it did tell me something I didn’t know; namely, that the Jockey Club now has a division in California’s high-tech Silicon Valley town of Mountain View.

The bigger question is who is the Jockey Club accountable to. Is it simply Phipps and Farish and their hand-picked stewards? Is the breeders who have paid registration fees over the 100-plus years of its existence? Is the Thoroughbred industry at large? If there is accountability to the industry, why isn’t there more transparency in the operational and financial activities of the Jockey Club and its various subsidiaries? Why is its membership so restrictive and its governance so secretive?

James Gagliano, one of the aforementioned executive vice presidents, touched on some of these questions, during the Jockey Club Round Table in August in which he discussed some of the activities of the Jockey Club and its affiliate for-profit companies. Click here to read Gagliano’s remarks.

Are you satisfied that the Jockey Club is properly and responsibly representing the best interests of the Thoroughbred industry? Let us know in the comment section below, or take the Daily Paulick Poll about the Jockey Club and its activities, located on the left-hand column of the Paulick Report home page.

Copyright © 2008, The Paulick Report

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