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In a pleasant and unforeseen change, the Keeneland September yearling sale was a boon by every macroeconomic criteria. Gross receipts, average, median, and percentage of horses sold were all up.

Those are unreservedly positive changes to the Thoroughbred sales environment, which had spun into a massive depression following the collapse of the US and then the world economies, beginning in 2007.

In addition to the overall rise in the sale’s trend, most of the yearlings sold also cost somewhat less to produce than those sold last year, and therefore this should be a better year for the profitability and overall business health of horse breeders.

Rob Whiteley (currently the second-leading breeder in the US behind Frank Stronach) said, “The good news for breeders is that for the time being, the market has stopped its free fall. Whether this is a pause or a plateau is yet to be seen; we will have to wait for next year for further context. The sobering news is that the Keeneland gross of $223 million is short of 1999 levels, which underlines the current state of things, no matter what the mean or median. Profitability for breeders remains very similar to 2010 because breeders were selling yearlings based on 2009 stud fees.”

Those fees have come down the last two years, some of them substantially. And this year’s September sale clearance rate, the percentage of horses sold in relation to those cataloged at the sale, has risen.

“On the surface, the improvement in the clearance rate appears to be positive,” Whiteley said, “but it largely reflects the fact that many strapped breeders are unable to take the yearlings home and had to send them through the ring unprotected. It’s disappointing to see that approximately only two-thirds of the cataloged horses actually sold because the meter continues to run on many of them.”

With a sales median price of $30,000, there is limited room for profitability for about half the yearlings sold at this year’s sale. Whiteley estimates that the cost of producing and selling a yearling runs at least $35,000 plus the stud fee. For the median to be $30k, half of the yearlings sold for more than $30,000 and half for less. Considering the volume of fixed costs associated with producing a yearling and bringing it to auction, either the fixed costs have to decrease or the price of yearlings has to rise.

Which of those do we have some control over?

Whiteley’s summary was that “for things to improve, stud fees need to come down further, and our industry marketers and sales companies need to develop a program to bring in more end-users. At this point in time, the improved results, in part, reflect a reduction in supply. However, to significantly move the needle in a favorable direction, we need more buyers. Currently, our market is not only very thin but also vulnerable and scary in that the top three buyers accounted for approximately 15 percent of the gross and the top 20 buyers accounted for approximately 30 percent of the gross.”

In short, the rewards for breeding Thoroughbreds are strongly biased toward a small sector of the yearlings presented for auction. In a commentary about the September sale a year ago, I noted that the supply of yearlings in the September sale needed to decline drastically to make the market more stable, and this year’s auction reflected about half the reduction I estimated would set the market to rights.

Breeders have clearly heard the message of less is more through their own pocketbooks, and they are reacting to the abuse coming at them from the sales by slashing their broodmare bands, breeding fewer foals, and buying more stud fees that offer them some hope of making money. It is the way of the future.