Sikura: Deal or No Deal?

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John Sikura John Sikura

The following commentary was submitted by Hill ‘n’ Dale Farm owner John G. Sikura

I wish to preface this letter by saying that yes I stand stallions, own shares in outside stallions and breed to both race and sell at public auction. I say these things to demonstrate that I am sensitive to the needs of breeders and understand how crucial it is to make a profit when breeding for the market.

Recent trends of market contraction, in terms of auction prices and numbers of foals born, have created intense competition for mares, which has given the breeder many new options to consider before deciding which stallion to select. What started off as innovation and recognition that terms should tilt more in favor of breeders, have now started to erode the stallion market and the essence of ‘fair market’ competition.

This is a business of risk. Most breeders and race horse owners do not make money. We are not a socialized industry that rewards the ‘norm.’ We are incentivized to produce the best yearling because the market rewards such and the consequence for not doing so are dire. Providing ‘stands and nurses’ contracts and reducing stud fees are market driven and absolutely fair for the breeder. Paying me a stud fee in two years, if you make money, is artificial and, in my opinion, misleading commerce.

International trade requires that countries not practice ‘dumping,’ a term that is defined when a country offers a product at a price that has adverse effect on others in the industry that offer a ‘like product.’ If you can breed to my stallion and not pay a stud fee unless or until you make a profit that is not fair competition. There is no incentive to breed a market superior horse or suffer any consequence for breeding and/or raising a bad horse.

Furthermore, mares that have gradually exited the commercial market are coerced back into production, as the consequence for breeding a bad horse does not include paying a stud fee. If you think the practice is fair, please pass this guarantee on to the yearling buyer and offer their money back for every yearling you sell that does not earn his/her purchase price or tell your trainer to take your bill out of purses.  That would be unreasonable would it not? If I sold yearlings under that premise I bet fellow breeders and consignors would complain that I have artificially inflated the price of my yearlings as the buyer has no risk. Furthermore I have created an artificial market for my yearlings that precludes competition and has an adverse effect on producers of a similar product within the industry. That by definition is inflationary of my product and distorts the market reality. The same thing occurs if I cover 150 mares but no one pays a stud fee. I can state ‘book full’ every year.

The effect of such practices goes beyond the economic argument of ‘unfair pricing,’ which is prohibited in free trade. The reality is that stallion owners buy a horse with the purpose of selling seasons as the method of repaying their debt. Most of us do not have the luxury of buying a stud horse and having no projected rate of return or reasonable time frame to do so. Is the bank going to lend money to purchase a stallion under those terms? Can a farm syndicate a stallion when someone can breed for free? Breeders should be prepared to see increasing books and higher prices on all popular stallions as a reaction to exclusive patronage of the ‘deal stallions.’

The days of the ‘proven’ middle aged stallion, or promising new entry market level stallion standing in Kentucky,  have come to an end. It is ironic that the ‘little guy’ has been duped into being complicit and will therefore have helped limit his own choices of stallions available and farms to trade with.

I believe in the free market and have a firm belief in my ability to compete, so I write this letter to ask for nothing more than to state my objection to the ‘socialization’ of the stallion business. The ‘upside’ we at Hill ‘n’ Dale provide breeders is that we make stallions and continue to breed, raise and sell prolific race and sales horses.

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  • Bocephus

    Stallion owners have been skinning breeders alive for decades. He says it himself–”most breeders and race horse owners DON’T MAKE MONEY.” We’re supposed to have sympathy for this guy because the rules of the game have changed and he’s not making as much money off breeders as he used to? Sorry, buddy, I’m all out of Kleenex…

    • Oscetra

      Ditto!

  • Let the fur fly…

    Everyone is angry with the Spendthrift Breed Secure program. Competition is keen for mares this year. Several are whining loudly about the Breed Secure program. I will use it as an opportunity and a much needed break. All of my mares will go there this year and I expect to have a very successful crop. Yes, it limits my choices but also opens new ones. I am not being duped. One never knows where the great ones will come from. Thank you Mr. Hughes for the outreached generous hand this year, a time I need it. May my future foals be champions for your young stallions!

    • http://twitter.com/Bravo_puppies Anne

      Who is everyone, other than Sikura?

      • Let the fur fly

        Other stud farms, Ashford, Winstar etc….

        • MightveBen

          Agreed. However, some farms have already joined in publicly or privately. Darby Dan has their own version. Some farms are just waiting to see if the program works or if/when they have to develop an answer that is more effective than John’s whining.

  • john

    thank you Mr Hughes for looking out for the horse business, l am breeding back to you again this year. Mr Sikura take your bat and ball and go home

  • Waquoit

    So what this guy seems to be saying is that “competition” is fine as long as he has the upper hand. Now that the market has shifted to his detriment it’s socialism. Typical bully tactics.

  • http://twitter.com/mikedorr77 Mike Dorr

    “…’unfair pricing’… is prohibited in free trade.” The hell it is. There is no unfair pricing in free trade, the price is whatever the buyer will pay. If Spendthrift wanted to pay the Mosses $100,000 to bring Zenyatta to Malibu Moon for advertising, they could do that. A negative stud fee. More than fine.

    The risk-sharing arrangement does not preclude having a rate of return or a decent payback period. I assure that mathematics is flexible enough to calculate ROI when not all revenue is upfront. The risk-sharing strategy may lower the average price or it may increase it, but the additional covers are almost certainly going to pay off – Spendthrift has identified a better means of assessing the “marginal” stud fee for their stallions, that allows them to maximize their covers.

    I would be remiss to cite economics or mathematics when railing against innovation. If Spendthrift were not succeeding with this program, I’m certain you’d be encouraging many of your competitors to give “share the upside” a shot.

  • Barry Irwin

    Spendthrift Farm’s tactics, while appealing on a certain level, have many unintended consequences. In addition to killing the marketplace for middle stallions entering stud, Spendthrift has potentially put a big hurt on the very yearling sellers it promises to help. Yearling buyers are encouraged to buy high-priced yearlings when there is the promise of a reward at the end of a runner’s career. The way B. Wayne Hughes has structured his deal, there will be room for perhaps 3 new high priced stallion entries a year, with the rest having little or no value. Who is going to spend a 7-furlong sum for a yearling in hopes they will be lucky enough to wind up with one of the 3 new horses going to stud at a big figure? The next 15 or 20 that would have achieved sale prices for stud in 7 figures are now going to be worth very little. Racing has never been about the lowest common denominator. Racing, breeding and selling is about hitting home runs. The number of home runs now available has been reduced by a staggering number. I don’t think Keeneland or Fasig-Tipton is a benefactor of Mr. Hughe’s policies.

    • http://twitter.com/mikedorr77 Mike Dorr

      Mr. Irwin, I believe you assume a world where the Spendthrift “Share the Upside” program becomes the norm for the industry, but I think that’s far from a settled issue. The lengthy time between cover/foaling/auction/training/racing/stud makes it very difficult to properly price stallion fees, especially on the low-end of the market. Share the Upside, for all intents and purposes, is an exercise in price “discovery” for the lower part of its roster. I think at the top-end you’ll find Spendthrift to be a very traditional farm. Let’s be honest, Malibu Moon is still paying their bills. But the risk-sharing program allowed them to identify Into Mischief as better than he was, and he won’t be in that program for long.

      It may be easier to say that, at the top of the market, the demand is for studs, who can command a price. At the low-end of the market, the demand is for mares to cover, so the farms can find out what they have. A single pricing strategy (stud fee, S&N) simply doesn’t work at the different market dynamics. I don’t see the high-end of the market moving to a new pricing scheme, and $1M yearlings aren’t coming from $10K sires.

    • Econometics

      Dear Barry:

      Since you have provided numerous self-generated, unsubstantiated numbers and theories, perhaps you would provide us also with how you arrived at them? I wonder who has been spending 7-furlong figures when the current odds of purchasing a future MGSW are less that 1%, and are not much greater when purchasing from a blue-blood pedigree cross. The number of mares bred and the number of stallions available you find undesirable has no significant impact on the recognition and purchase price of good horses, or the number available. The market is not determined by the number of participants, but by the quality and selection of product. There is nothing other than opinion to support the notion that either will suffer.

      You may have to realize the value of your stallion prospect over the course of his breeding career instead of expecting to be “out” with a profit in three years. Just like the “good old days” when the value of a stallion was based on long term performance and not just 3 races and a lot of hype. Making a stallion is based on more than how much the syndicate partners paid. Since you value the keeping things the same, perhaps you and your syndicate buddies should reevaluate your business plan and revert to ones that worked in the “Golden Years” of thoroughbred racing. Worried about the value of Animal Kingdom, Barry?

    • Stanley inman

      Barry;
      Spendthrift isn’t killing anything
      They are disrupting the status quo
      And we’re for that, right?

  • riatea

    No sympathy from me. Lower your stud fees; if you can’t then go out of business so your stallions can go to someone who can afford to stand them at a reasonable fee.

  • Windways

    I would suggest that it is John’s interpretation that the Spendthrift arrangement is unfair pricing. I would also suggest that the Spendthrift arrangement will intice people to breed mares that other wise (probably with good reason) would not enter a breeding shed this year. With nothing to lose, they will flood the yearling market with a non-commercial product. They will also be the first to complain and blame the sales co., the consignor etc etc.

    • HelenBach

      You are my Star.

    • http://twitter.com/Bravo_puppies Anne

      I know a lot of people breeding mares at Spendthrift this year, and not a single one are mares that wouldnt be bred otherwise. As has been said, the stud fee is the smallest part of the sale yearling equation in this situation. Do you really know anyone who has a $100 TB mare in their back yard to will say, wow, I can breed to X stallion and not pay the stud fee until the sale, I think I will breed her to him and pay $20,000 up front in board, vet, sales prep to get it to the sale. You think they have nothing to lose? You’ve never raised a horse.

      • Windways

        Lot’s of people are breeding at Spendthrift because they have a great selection of stallions and they like Mr. Hughes and his program. I’m talking about the bottom 5 to 10% of mares. I happen to one that had borderline mare, and decided last minute to go to Spendthrift stallion. I like the stallion just fine but Mare’s offspring have been disappointing commercially.

  • WATERBOY!!!!!

    john don’t worry bro bro the way the world works is those who want deals and things for free don’t stay around and get exactly that something not worth having and will be paying bills for years only to have limited sucess! i’ve been knowing your integrity for many years now and know that is something VERY hard to find in KY and at the end of each day when other are still asleep you are in the office making things happen. Remember just because the cheese in the trap is FREE doesn’t mean the RAT leaves happy!!!

    • HelenBach

      What a moving and brilliant analysis of the business, bro.

      • Red Rider

        Waterboy, bro.

        Everyone hates a happy RAT (caps indicate a big rat).

        Bro, you possess a clarity of expression and thought that is infrequently experienced. Your words provide me and likely others, as well, with a renewed appreciation for meaningful prose.

    • My Two Cents

      John and Waterboy, I agree accepting the free cheese whilst head in trap is not at all fun. Not to mention the suffering of those unwanted foals down the road. That is why I passed on joining the upside. However, with that being said (and I am also a stallion owner), here remains the problem. For years stallion farms have overpriced their stud fees leaving nothing on the table for breeders. By my estimation only 1% of yearlings are profitable. It would be helpful if Kentucky would get with the program and pay stallion owners Breeders Awards, so that deserving stallions reap the benefit of success, and those that do not cut it, stop breeding. The current model rewards up-selling stallions whose progeny turn out to be worthless, while breeders/mare owners go broke. I would say most stallions need to cut their fee in half. I would call this join the Fair Side program. And by the way Barry Irwin, I would love to breed to Animal Kingdom (if he’s priced right of course).

  • oldbay

    I wonder if anyone ever told Mr Huges that it was a dumb idea to think that people were going to pay you store their junk? There is a reason Mr. Huges has been successful. The only thing that could hurt Spendthrift from doing this would be if another farm with better, more proven stallions would copy it. (hint, hint Mr. Sikura)

    • HelenBach

      Only a fool would pay someone else to store their worthless junk.

      • oldbay

        I think you missed my point. It was referring to Mr. Hughes and his success with his Public Storage company. Sarcastic

        • HelenBach

          I did not miss your point. I was adding em fas iss!

      • LongTimeEconomist

        Then America is full of fools.

  • Teresa Murphy

    Very interesting that the Spendthrift incentives are causing such a stir. I think breeders can and do make money but they have to be very cautious in spending their money. Perhaps in the old days one bred 5- 10 mares and made money on some and lost money on others and in the end you made enough to support the mares. With profit margines ( stud fees, feed cost, board per day in Ky) so thin those low level mares are gone. They are not in the back twenty -they are gone. Does Mr Sikura really believe that there are vast numbers of empty mares who will now will be sent to the breeding shed because of these incentives?

    Gone are the days of vastly over breeding a low level pedigree- you still have to feed the mare, birth and raise the foal, sales prep and pay for vet services. All those costs and what if right away you are dealing with the not perfectly correct foal? Not all runners are perfect but all sales horses must be…I think most of us have learned that the costs are just too high on a mare that can’t even cover her yearly expenses. Maybe this deal will entice someone to try a maiden that won some money but it will not bring those mares back that were not worth the cost of production.

    I for one appreciate that Spendthrift is seaching for ways to share some of the costs of production. For the first time is several years I feel valued by a farm. Frankly I had forgotten what it felt like.

  • Anton Chigurh

    Good luck putting the toothpaste back in the tube.

  • Allison Roulston

    “Would you like some cheese with that whine?”

  • Richard C

    It reads like something from an owner of a pro sports franchise who is always complaining about not having the financial resources to field a contender — but is never so “poor” in the checking account to sell a club which amazingly appreciates in value each year.

  • HelenBach

    Dear John, Barry, and other would be protectors of the breed:

    Please explain the justification for H ‘n D standing a first year stallion that ran one time and then broke down. Exactly how does that serve the welfare of the industry. Does the “bargain” $6500 stud fee attract mares that would otherwise not be bred? Probably no more than the new programs you detest, which is next to zero. We can tell you think breeders other than yourself are stupid, but we really don’t breed bad mares to produce bad foals so we can sell them for $1000. Since it costs$10-15k just to keep the mare per year, what business model do you know of that we don’t that would justify this.

    As to your stallion values, Mr. Irwin: most are overpriced in syndication. Maybe they should prove themselves as sires, a la Tapit and Tiznow, instead of sending them to the breeding shed for $35k after 3 or 4 races! These three race wonderkin are the real beneficiaries of the truly stupid and high risk taking breeders. Gio Ponti ran 29 times and won six million. His fee is $20k, for now. Other flash in the pan runners are involuntarily retired for significantly more before they have even run past May of their 3yo year.

    • Windways

      HelenBach: Vice Regent got hurt before he ran, Danzig ran 3 times before he was retired and so on. Wrong argument!

      • HelenBach

        Dear Kenny:

        The exception does not make the rule or justify stud fees for stallions that I will refrain from naming to save their farms the embarrassment. Prove your stallions in the breeding shed, like Vice Regent and Danzig, who did not start out with unjustified fees. The argument is valid.

      • HelenBach

        BTW. Vice Regent did run 5 times; 2 wins, 1 place. He also had some pretty hefty close relatives. He and Danzig also started their careers during the bloodstock boom of the early 80′s. Than though high, their initial fees reflected an overheated market which has not existed for 20+ years. Your point is not relevant to today’s market, and confirms that you are living in the past. If you wish to make a point, it aids credibility to have “facts” represent more than a passing impression of what occurred.

        • Windways

          Helen: we can add Malibu Moon to that list as well, but you get the point. I do agree that all these horses proved themselves by way of their progeny success before having their stud fee skyrocketing. Hopefully we can find the balance between a good commercial market and the real world of racing.

          • HelenBach

            Thank you for choosing Malibu Moon. I was hoping someone would help my argument by noting his fee and position on the General Sire List. He actually supports my argument even more than Tapit and Tiznow. He started out in MD at a VERY LOW stud fee commensurate with his demonstrated abilities. As a result, he was then bred to mares that would not pass the Sikura sniff test. Nonetheless, he overcame a less than 1% chance of success. His current fee is justified by his production, not syndication cost. Those who initially bred their undesirable mares to Malibu Moon in order to knowingly produce a bad yearling would certainly fall into the Sikura “duped” category.

            The thoroughbred market will adjust to the new breeding programs, just as it is adjusting now to inflated stud fees for both proven and unproven stallions, and the weak yearling market. The market adjustments, however, may not favor John, Barry, and, I suspect, your interests to the degree they have in the recent past. The “free market” may readjust the perspective for the sages of equine economics by forcing them to come down from their high (and over-priced) horses.

          • http://twitter.com/Bellwether4U Bellwether

            I’m pretty sure The Moon Man started out @ $2500…Country Life in Md…

      • http://twitter.com/Bravo_puppies Anne

        So you have to go back to 2 stallions that were foaled in 1977 and 1967 to find some support for your argument? Nice try.

  • Lhartley

    >>Most breeders and race horse owners do not make money.<<

    then how can they stay in business or support themselves? perhaps it is more of a hobby.

  • Gary Fenton

    I think I remember reading the same piece from the CEO of AT&T in 1982.

  • Knowitall

    Sikura should write a book on how to make friends in business…I’m sure it would be a success if they gave the book away;-)

  • Concerned Observer

    Quote “Most breeders and race horse owners do not make money”. Amen to that!
    So why do we owe you a profit, as we lose our butt? You stallion guys, still have a “take it or leave it attitude”. Hven’t you learned yet …..that we actually can leave it….adios… hope you find a new group of folks to play by your rules. But it won’t be me anymore.

    • Oscetra

      “Adios!” We will breed, race and sell the best horses and jam it down their throats…

  • Red Rider

    “There is no incentive to breed a market-superior
    horse or suffer any consequence for breeding and/or raising a bad horse.”

    Breeders don’t knowingly breed lousy horses to avoid stud fees any more than stallion farms knowingly overbreed or book an unsuitable mare merely to collect a stud fee. Wait, I take that back. I’ll get back to you with a better analogy.

    • Stanley inman

      Let’s see,
      John (plantation owner)
      Is upset
      because we (his sharecroppers)
      Are talkin
      to his neighbor?
      scared we might
      Walk

      • Stanley inman

        Even though he has one of the hottest new sires
        Raised his fee 30 per cent days ago
        Yet still claims he’s a victim to
        “unfair trade”

      • Uncle Remus

        Or maybe John and Barry are afraid that poor Brer Rabbit will throw himself into B. Wayne’s briar patch and harm himself?

    • Knowitall

      This made me giggle. Maybe John will come back and tell us how selective the mares were in his books a few years ago in the top of the market when he often placed a few of his studs right behind Ashford in the Big Book Derby?

  • http://twitter.com/CarolineMBetts Caroline Marie

    Interesting. It is not the case that “international trade” somehow “prohibits dumping”. International trade is what it is – cross-national economic exchange. The World Trade Organization, of which not all countries are members, condemns dumping and hears dumping disputes between member countries, but does not prohibit dumping. For better or worse, there is no “world police force” which somehow precludes and jails countries for “unfair” economic practices. FWIW, “dumping” of products internationally is defined relative to the price of the product sold for consumption in the exporting country’s home market (not the importing country’s market), and determination of actual injury is a) quantitative and b) often difficult http://www.wto.org/english/res_e/booksp_e/analytic_index_e/anti_dumping_02_e.htm#article3

    • MightveBen

      John’s misconception of free trade, dumping, etc.does not merit addressing. It is just another illogical series of statements lumped together to comprise a temper tantrum. Making him take a “time out” would be more useful than providing a brief essay on world trade law.

      • http://twitter.com/CarolineMBetts Caroline Marie

        Au contraire… it’s the only attention and time warranted by this statement and entire issue. Notably, if I had a dollar for every time someone in horse racing made a completely fallacious, illogical, or entirely empirically unfounded claim that some scientific “fact” supported their assertions I could buy the freaking industry and shut it down until the morons and the misinformation stopped.

        • MightveBen

          Windmills have often been the target of choice. Best of luck.

  • Red Rider

    Never play ice hockey without a helmet!

  • The Fourth

    Clearly much of the bluegrass has declared war. I don’t know about the rest of you, but I’m now getting at least one call a week from agents or farms trying to scare up mares and several of them have participated in some kind of bashing of Spendthrift. Be it in the form of backhanded compliments or outright attacks. Some are big fish some are little fish but they are all looking for the same thing, more breeders. Hughes did the economically intelligent thing, nothing different from every other American company out there right now. By opening these programs he is able to ensure support for his new, unproven stallions AND at the same time able to likely drastically reduce his own costs by not having to maintain a large broodmare band to support them himself. If you are able to save a few million a year in care and keeping of mares, that easily off sets the loss you might take down the road in the sales ring. I find Mr Sikura’s attitude that I should expect to lose money and pay him for the privilege of doing so, really quite offensive.

    • Red Rider

      Well said and true. The natives are restless, and some are hostile.

  • http://twitter.com/Bellwether4U Bellwether

    CRY BABY CRY!!!…

  • http://www.facebook.com/marc.ferrell.9 Marc Ferrell

    As a new farm owner I am now delivering my 3rd crop of babies this year with a broodmare band of 12 in KY. I fully support capitalism which has made this country and its immigrants who they are today. Capitalism gives any individual the ability to put out and sell whatever product and whatever price they see fit. (Of course within certain restrictions to keep us safe). If the market does not respond to their innovative way of thinking then their venture fails, if the market responds, then they have discovered a niche that can make them profit. That is what makes all businesses in the USA function. While I appreciate the articles honesty, it smells of a frustrated industry who is threatened by this change in the way stallions seasons are being sold.
    Personally I have never purchased any of the “share the upside” deals as the stallions we breed to have not been in those programs. However, if one passed by my desk that we felt fit the mare then I would not hesitate to do so.
    As the article stated, most owners and breeders do not make money. That statement is very correct, but we must not accept that as the way it is and think we should make changes to allow all to make money. Not just a few.

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