When Rob Whiteley managed the Foxfield commercial breeding operation for corporate raider Carl Icahn, he had to justify every dollar on the ledger sheets for the real-life Gordon Gekko. You couldn't pull the wool over Icahn's eyes on fiscal matters.
Today, free from Icahn, Whiteley runs his own operation, Liberation Farm, breeding and selling Thoroughbreds for the commercial market. He applies many of the lessons and disciplines he learned from his old boss. Coming out of the recent Keeneland September yearling sale, the most important marketplace for commercial breeders, Whiteley examined the profitability of the business he has dedicated himself to since leaving academia 25 years ago (his pre-racing resume includes Stanford, Rutgers, Harvard and the University of California at Berkeley).
The resulting article was published in the Thoroughbred Daily News last Friday, Oct. 3. If you haven't read it, and you have any interest in the future of this business, Whiteley's analysis is a must-read. (The TDN is a subscription-only site, but there is no charge for an online subscription.)
What Whiteley found may have been shocking to some, though not necessarily surprising to the many small, blue-collar breeding operations scattered across the rural landscape of Central Kentucky: breeders are bleeding red ink. Many of them face uncertain futures, even without the greater financial crisis brought on by tighter credit markets from the Wall Street/banking meltdown.
Whiteley found that fewer than one in five yearlings catalogued to the Keeneland September sale led to a break-even or profitable result for its breeder. He detailed the example of how a yearling produced through a $20,000 stud fee and selling for $70,000 at public auction (3.5 times the stud fee) does not cover all the expenses associated over the 30 months it took to plan, produce, raise and bring the horse to market.
The most profitable days of the September sale, of course, came at the front end, when not quite two of five yearlings catalogued (38% on days one and three, 37% on day two) broke even or sold for a profit. After the first eight sessions of the 15-day sale (in other words, all of the second half), profits were as thin as a Parisian runway model — the high was 14% of horses catalogued on day nine and the low 0% on day 15.
Worse, Whiteley's expense assumptions in his profit-loss formula may be on the conservative side. He doesn't factor in the general and administrative expenses that most businesses absorb or the three in 10 chance that a mare will have a non-productive year (barren, slipped or dead foal).
The problems breeders face are mounting. The price of hay, feed, fencing and vanning are quickly accelerating. Auction prices are retreating, and there is little being done on the national level to bring new end-users (horse owners) into racing. The industry is retracting on many fronts.
Not all breeders are affected equally. For those operations that are secondary businesses or hobbies for multi-millionaires or billionaires who inherited their money or made it in other industries, the losses may be used to write-off profits made elsewhere. Major breeders who stand high-end stallions have that lucrative end of their business to hold them up.
But where this hits especially hard is the backbone of the industry, the small mom-and-pop operations that may own a half-dozen mares, sell their best yearlings and race the rest. They don't have income from other industries or trust funds to balance their spreadsheets, but they do, collectively, have a huge impact on the overall infrastructure of the horse industry.
Whiteley isn't whining, and no one put to a gun to his head to buy all those mares he now owns (or co-owns with a bank). He also understands that free-market economics, and the laws of supply and demand, need to run their course. He didn't publish his complaints without also coming up with what he believes is a short-term solution.
The article describes the industry's “big three” as sale companies, the veterinary community and stallion owners, and suggests they will be the next group to suffer if the economics for breeders do not improve, and they are forced out of the industry. Fewer breeders will result in lower demand for stallion and veterinary services, and certainly lower profits for Keeneland and Fasig-Tipton.
Whiteley calls for an economic stimulus plan to be borne by the big three: for 2009 only, a 50% reduction in stud fees, a 50% reduction in the cost of services (and medication markup) provided by veterinarians and a 50% reduction in the commission collected by sale companies.
Of course the chances of this actually happening are somewhere between slim and none. Stallion owners will say their fees are based on demand, and veterinarians will cite their rising costs and the investments they've made in equipment and education. Sale companies will say they've got to making a living, too.
Something, somewhere has to give, or we will see a major exodus from the industry of small businesses. That won't be good for anyone.
MORE BAD NEWS ON THE RACING FRONT. Turfway Park closed its fall meeting with significant declines in business, both on and off-track, where handle fell 18% and 20%, respectively. There were circumstances to the numbers being so far down (aren't there always?), but they add yet another chapter to a very troubling sequence of bad economic news for the pari-mutuel side of the Thoroughbred industry.
Keeneland did a very good thing when it purchased Turfway Park and perhaps kept it from being developed for commercial use, though I'm not sure why it is necessary for the cash-rich company to have a partner in Turfway that has no interest in the success of horse racing (a casino company). Many blue-collar Kentucky breeders race their horses at Turfway Park, and the decline of the track since its purchase by Keeneland and partners has been yet another blow to those breeders, who are now shipping their horses to race out of state in increasing numbers to places like West Virginia and Pennsylvania.
Turfway needs an injection of capital and creative or intellectual investment that Keeneland so far is not providing. Investing in Turfway is one way of helping Kentucky's breeders.
Copyright © 2008, The Paulick Report
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