by | 11.17.2010 | 12:47am

By Ray Paulick
The world was a different place in the first half of 2007, when Thoroughbred breeders finalized the matings that resulted in the 5,000-plus yearlings to be led into the Keeneland sale ring, starting this morning at 10 a.m. and continuing over the next two weeks in what is this industry’s biggest marketplace of its kind.

The Paulick Report will be at Keeneland, providing live blog coverage throughout the day during Monday and Tuesday’s select sessions.

When the 2007 breeding season began, the Dow Jones Industrial Average was flirting with the 14,000 level. Unemployment in the United States was at 4.5%. Financial institutions like Lehman Brothers were solvent. Automakers General Motors and Chrysler, while being outperformed by foreign companies, were not teetering on the brink of bankruptcy. Most Americans had not heard of the term “sub-prime mortgages.” Pari-mutuel wagering on Thoroughbred racing, the economic engine that drives the horse business in North America, was coming off a year of modest growth. The 2006 Keeneland September sales had a blockbuster year, buoying the spirits and pocketbooks of breeders and consignors, and those many other businesses that feed off them.

Then, one year ago, this country was pitched into the depths of a major economic crisis that affected nearly every financial market in the world. It bubbled over in the middle of the 2008 Keeneland September sale, and the ripple effects of this crisis touched everything in our lives. The Dow Jones average plunged, eventually dropping below 6,600 before inching back upwards in recent months to its current level of 9,600. Market capitalization of companies and net worth of individuals plummeted as a result. Businesses failed, led by financial institutions like Lehman Brothers and automakers like GM and Chrysler, leading to government bailouts. Unemployment doubled to its current 9.7%. And in our little corner of the world, the pari-mutuel racing business, handle will have fallen from 2006 levels by almost 20% by the end of this year.

Is it any wonder Thoroughbred breeders are nervous about how their goods will be received at this marathon auction? Even in the “good old days” of 2007, the Keeneland September sale suffered declines from the record average of $112,427 in 2006, and by the end of the 2008 sale, prices had fallen by 19% from 2006 levels. Making matters that much tougher for breeders today is the fact their 2009 yearlings were produced from record or near-record high stud fees, which were driven north by those sky-high sale prices of 2006.

We don’t expect the results of the Keeneland sale to paint a pretty picture. However, the sport of racing continues to hold a grip on people who might not be able to afford an NFL team or Major League Baseball franchise but enjoy the competitive nature of seeing who owns the fastest horse. It’s a game that intrigues sheikhs, princes, and titans of industry, along with individuals of far more modest means who all share the same passion: the Thoroughbred racehorse. It’s a cyclical business, and we’re in a down cycle right now. The only questions are how deep is the bottom and how long till we get there. The next couple of weeks should help answer those questions.ring

10:15 a.m. … The day's first piece of good news. At 10:05, Sheikh Mohammed, the ruler of Dubai and the industry's leading buyer of Thoroughbreds, popped out of a black Escalade, with an entourage of eight in tow, including his wife, Princess Haya, and bloodstock agent John Ferguson. There had been some speculation that the sheikh, who was on the sale grounds looking at horses over the weekend, may have left for his home and would not attend the auction personally. He always seems to spend more money when he's here, so his presence is indeed welcome news for all horse sellers.  Ferguson, the sheikh and his wife ducked into a private meeting room, presumably to plan their strategy for the day. He had a cell phone glued to his ear the entire time, suggesting there may be some business to attend to at home.

The second sighting of the day wasn't quite as positive. Eddie Musselman, who publishes the Indian Charlie newsletter, was standing by the front entrance. “Hello, Eddie,” I said to him as I walked by. “Hey, Crackpipe,” he said. Funny guy, huh?

11:45 a.m. … Yearling sales almost always get off to a slow start, especially in such a volatile economy, and this one's no exception. Of the first 14 through the ring, seven were bought back by consignors, including three of the first four. John Ferguson made his first purchase of the sale, Hip 9, a Storm Cat colt from the Overbrook Farm dispersal consigned by Eaton Sales. Ferguson signed the ticket on behalf of Sheikh Mohammed for  $360,000.  A bigger number came Ferguson, standing alongside the sheikh, bought Hip 39, a Speightstown colt from Gerry Dilger's Dromoland Farm, for $700,000. Dilger is riding the wave of publicity generated from the Grade 1 successes of two of his 2008 yearling sale graduates, Spinaway winner Hot Dixie Chick (which he co-bred with Peter Blum) and Hopeful winner Dublin.

12:10 p.m. … The early results show a  pretty stiff drop in prices. Of the first 41 yearlings catalogued, there were eight withdrawn from the sale and 15 listed as not sold or Reserve Not Attained. New this year, Keeneland is offering bidding on the RNAs, and the results sheets have a link permitting buyers to submit an online bid. 

Of the 18 that sold from the 33 through the ring (45.4% RNA), the average price is $228,444 and the median $182,500. That's a big drop from the 2008 opening session when the average price was $363,942 and the median was $300,000. But it's very early to base anything from these numbers.

3:20 p.m. …  It's not so early anymore, and the numbers are not looking good for the first session.  Of the first 125 yearlings catalogued, 62 sold for an average of $234,629 and a medican price of $205,000. There have been 49 RNAs, or 44.1%, and 14 have been withdrawn. No horses have yet reached seven figures. Those numbers are substantially worse  in all categories than the opening session in 2008 (down 35% in average, 32% in median).

John Ferguson has signed the tickets on nine yearlings for $3,490,000, or roughly 24% of the gross through the first 125 catalogued.

4:00 p.m. … The RNA rate has dropped only slightly, to 41.5%, through the first 146 catalogued hips. The average of the 76 sold is at $230,315 and the median is $192,500 from a gross of $17,504,000.. The top price is the $925,000 paid by Coolmore agent Demi O'Byrne for Hip 141, an Unbridled's Song colt out of Goulash, the dam of champion Ashado. 

The RNA average is $185,778, including the $900,000 buyback price for a Distorted Humor colt out of the Unbridled's Song mare Forest Music. The colt was consigned by Jess Jackson's Stonestreet Thoroughbred Holdings. 

Ferguson has purchased 13 of the 76 sold for $4,530,000 to pace all buyers.

4:15 p.m. … “In a word, it's bad,” one consignor told me as the sale's first day was entering the final 20 hips. “There's not much depth right now, and you have to remember that as many as 50 of the first-book horses ended up in the Saratoga catalogue. Those horses had to come from somewhere, the most of them would have sold here in the first two days.”

The two-day Fasig-Tipton select sale of yearlings in Saratoga Springs, N.Y., wound up with an average price of $328,434, thanks in large part to the impropved catalogue under the new ownership of Sheikh Mohammed's associate that bought the company. I don't have the numbers in front of me, but it will be interested to review the history of the two sales–Saratoga and the first two days of Keeneland September–and see when the last time was that Saratoga had the higher average of the two.

4:30 p.m. … Right now, absent some big horses selling at the end, the average price will be in the $225,000 range and the median will be around $195,000. That's a drop of as much as 38% in average and 35% in median. The RNAs are at 42.2%, or 62 of the 147 through the ring. Business is brisk in the bar area, though.

I'll have the final numbers and some comments around  6 p.m.

6:00 p.m. … Monday's first session ended with predictable business declines across the board, but they were even worse than Keeneland's director of sales Geoffrey Russell anticipated. The number  of yearlings sold, 107, was down 30.5% from the 154 that sold on 2008's first day, and the gross, $24,949,000, was a jaw-dropping decline of 55.5% from last year's $56,047,000. The average price of $233,168 was down 35.9% from 2008, when the average was $363,942, and the $200,000 median represented a 33.3% decline from 2008's $300,000. “The pendulum has swung on the buyer's side,” Russell told reporters after the final horse through the ring had sold. He used words like “hesitant” and “careful” to describe their bidding. “It was tough out there,” he said. “Readjustments are never easy, and we are in the middle of a major readjustment.”

The percentage of RNAs, or horses not sold, was 41.2%, a big jump from the 29% unsold on last year's first day.

That readjustment may have begun two years, at the 2007 Keeneland September sale. The 2007 sale had a tough act to follow, since the overall 2006 sale set an all-time record for gross, average and median prices. The opening day of the 2006 sale had an average price of $471,872 (which actually was down from 2005's $539,264). Opening day fell to $394,123 in 2007 and the aforementioned $363,942 last year. That's a decline of 56,8% from 2005 till today.

Worse, the total dollars going into the pockets of breeders fell from $88,712,000 on the first day in 2005 to $24,949,000 today. That's a $64 million question: How is this 71.9% decline in gross receipts from one day going to affect the business?

There were zero $1 million or more yearlings sold Monday, marking the first time since day one of 1996 that the opening session failed to bring a seven-figure yearling. By comparison there were 21 million-dollar babies sold on day one in 2005.

John Ferguson was the day's leading buyer, with 14 purchases totaling $4,830,000. Blandford Bloodstock bought eight for $1,842,000, D. Wayne Lukas's client Westrock Stables LLC bought three for  $1,285,000, Sheikh Hamdan's Shadwell Estate Company Ltd. bought two for $1,230,000, and Coolmore agent Demi O'Byrne bought two for $1,065,000.

Keeneland's online bidding for RNA's attracted a “few bids,” Russell said, but he was unaware that any of the unsold horses had yet found new homes through this new process.

If there is a sliver of good news from these grim statistics, it's that Keeneland consignors only had to pay a 2.5% commission on RNAs, down from the 4.5% the sale company had been charging. The aggregate cost of Monday's RNAs was $14.5 million, and under the old 4.5% formula consignors would have paid a commission of $652,500. At 2.5%, consignors paid just $362,500, a different of $290,000 that Keeneland will not be charging and that instead will stay with consignors. Good news for consignors, but that's not enough of a silver lining to make the dark clouds of this market look any less ominous than they did today.

 Copyright © 2009, The Paulick Report

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