Oppenheim: The Sales Year

THE SALES YEAR

Throughout the last six months of the North American and European auction sales season, the theme has been pretty much the same: the market struggled to match 2015 levels, and in fact finished up below 2015, though marginally. The graph and table of 'US And European Annual Sales' clearly show this biggest and most important part of the international thoroughbred market made a $300-million recovery (25%) from 2012 to 2013, having crashed by a massive 45% between 2007, when we tallied annual sales at $1.942 billion, and 2010, when the market totalled just under $1.07 billion. The 2013 recovery essentially gained back half the market losses from the 2008-09 crash, but there has been no further progress; in fact, since 2013, there have been 12% more horses catalogued, but the clearance rate from those catalogues has dropped from 67.1% in 2013 to 61.5% in 2016. Meanwhile the combined NA/EU annual auction gross, which was $1.446-billion in 2013, edged up to $1.533 billion in 2015, but dropped back to $1.488 billion this year. So the market peaked at nearly $2 billion in 2007; crashed to under $1.1 billion in 2010; and recovered to around $1.5 billion in 2013, where it has stayed since.

As we've noted, the NA/EU thoroughbred auction market advance in 2013 was 25%, from $1.150 billion in 2012 to $1.446 billion in 2013. This paralleled the continuing recovery in the Dow-Jones Industrial Average, which advanced 26.5% in 2013, to close out the year at 16,576. Crucially, though, the thoroughbred market since then has grown by only 3%, to $1.488 billion, while the Dow Jones opened this week at 19,933–20% higher than at the end of 2013. The North American and European thoroughbred market is clearly not keeping pace with general economic growth, or at least with one of the most recognized market metrics.

A recent article by Michele MacDonald in the Racing Post (Friday, Dec. 23) reminds us that, at the same time the thoroughbred market is failing to advance, there has been a decline in the number of foals produced in the U.S. and the three biggest European racing countries, since 2007, of 30%–from 48,225 foals born in the U.S., Ireland, Britain, and France in 2007, to 33,949 in 2015. So there has been a 30% reduction in supply, yet there is also a 23% reduction in gross. The average price for 28,549 horses sold in 2007 was $68,038; in 2016, over 6,000 fewer horses sold–22,425, a decline of 21%–for an average of $66,357, which is 2.5% below the 2007 average. The number catalogued in 2016 was 36,459, and the percentage of listed sales from those catalogued was 61.5%. In 2007 also 61.5% of those catalogued sold, but 10,000 more horses (46,444) were catalogued in 2007.

So, in nine years, following a crash and a partial recovery, 21% fewer horses were catalogued and sold, for 23% less money, and the average declined by 2.5%. It can only mean one thing: the number of 'end-user' owners has declined at least at the rate of the foal crop, if not more; otherwise prices would rise. The fact is that, even with a 30% decline in the foal crop, the North American and European markets are struggling to sustain values. Contrast that with Australia, which has also, according to statistics cited in Michele's article, seen a 30% decline in its foal crop. According to figures produced for us last May by New Zealand's Arion Pedigrees, the gross at the Australasian yearling sales has increased by 45% since 2013, from $302-million in 2013 to $436-million in 2016. The percentage sold from the catalogues has actually gone up by 6%, and last year stood at 76.4%–15% higher than in North America and Europe; and the average rose by a third between 2013 (A$69,182) and 2016 (A$93,108).

There are a number of metrics which suggest that the real growth in the thoroughbred business internationally is in the East–Australasia and Asia. A lot of the younger people in the business believe this is the future, and the placement of bright young things in Australasia and Asia must be astronomical compared to North America and Europe. There isn't a big secret about the big difference between the emerging East and the possibly declining West–prize money. This is, of course a huge subject, and there are plenty of professionals who dispute whether prize money is such a critical incentive, citing the number of owners in Britain, who basically have no chance of recouping their investment through prize money, which is why Britain is such a huge exporter of 'used' horses. People have to sell their horses for there to be any chance of the business paying for itself, plus the horses are good; the Australians may hold their own in producing world-class sprinters, but when it comes to the 'two-turn' horses, European imports routinely sweep the board in Australia. The U.S. has fallen way behind in supplying horses to Australia, much less the other lucrative Asian markets like Hong Kong. The American combination of dirt and raceday medication doesn't play in these lucrative markets as long as they can source enough horses elsewhere, meaning Europe (and, in Asia, Australia and New Zealand), which they can. Another indicator that even though the prize money is better, it's still not good enough, is the reduction in field size in American racing.

The arrival of new major owners in the last few years is welcome, and has made a big contribution to prices remaining high in the top commercial tier, but it's very striking that many of the new top-level players are much more into controlling the numbers than some of their predecessors have been. Yes, the Qataris have made big investments, especially in France, but throughout Europe as well; yet, the number of horses they own is nowhere near the numbers built up by the Maktoums and other Dubai interests, not to mention some of the remaining big owner-breeder operations like the Aga Khan or Juddmonte. Note, too, that they routinely acquire horses after they've started racing, which means horses are filtering through breeders, pinhookers, and even 'end-user' owners. Once a horse gets good there is no shortage of buyers for it; but how many really 'get good' like that–1 in 100? You could say the same about American racing; I listened to the very interesting TDN podcast when Bobby Flay interviewed Sol Kumin, and what was so striking is that both are interested in having smaller, relatively manageable 'boutique' operations of top horses. Kumin, who is probably getting a little tired of being the poster boy for new owners, even commented at one point that, though they had bought Lady Eli as a yearling, he has been shifting the model of what they want to buy to horses which have already run. It's fantastic that guys like him and Bobby have discovered, and are enamored by, the business, and I wouldn't consider suggesting, for one nano-second, that they should do anything different from what they are doing. But note they are both being very selective about what they buy, and their numbers, in the context of even a shrunken foal crop, are quite small.

The big irony is that North America and 'Europe'–Britain, Ireland, France, and Germany, for our purposes–are still the world's best producers of top-class racehorses. Yet both North America and Europe have big problems–in many cases, different problems, but one that both now do have in common is that prize-money is not high enough to entice people in sufficient numbers to own racehorses. Australia and Asia have much better prize money models, yet still have a few pounds to find on form. But if North America and Europe do not find ways to change their prize money models to attract more owners, ultimately the popularity and enthusiasm of Australasian and Asian racing will match or outperform the current Number Ones; that's the way it works.

There is massive interest and enthusiasm among enough people who want to own good horses–'Saturday' horses–and there are even quite a few people, judging from the strength of the prices for broodmare and broodmare prospects, who want to breed them, and not just for money. But the polarity now between “what they want”–“they” in this case being a lot of people who are newly willing to put money in the thoroughbred business–and “what they don't want” is starker than ever. There are horse racing economies–national, international, and local–and there need to be more efficient methods both of producing the horses with the potential to achieve the various levels, and of placing the horses where they belong once their level is identified. In short, in order to improve its chances of surviving and prospering, 'Horse Racing Inc.' needs to take a really serious look at how it can reorganize itself. One glaringly obvious imperative is that American racing has got to find a way to create a national organization which makes and enforces the rules; the 38-state approach clearly cannot work. One thing I'm certain of is that all of racing's entities and factions are in competition with each other only to a certain point. In a broader context, horse racing is in competition with many other sporting, gambling, and entertaining businesses, and North American horse racing for sure has got one hand tied behind its back in not having a real, decisive, effective national organization. Partnership can be a very effective approach to the extent the prospective partners really do share common objectives.

Yeah, I get all that from reading the sales results. Do you think I'm reading too much into them?

TOP SALES SIRES

About 47% of 2016 NA/EU auction sales were yearling sales. This is by far the biggest and most important sector of the thoroughbred auction market–about $698-million this year. Five stallions–three in Europe and two in North America–which averaged over $500,000 account for around $99-million, or 14%, of these sales (click here): Darley's Dubawi ($1,267,131), Juddmonte's Frankel ($678,398) and Coolmore's Galileo ($587,359) in Europe; Gainesway's Tapit ($629,069) and Claiborne's War Front ($613,276) in America. 'Civilians', which is how we sometimes refer to people outside the industry, might be surprised that Dubawi averages double what Galileo does, but for anybody in the business, the difference in shall we say breeding strategies and the laws of supply and demand (at least 13 of the 17 Dubawi yearlings sold were bought by Maktoum family entities) definitely impact these figures. The 141 yearlings by these five sires averaged right around $700,000.

Very significantly, I would say, the next group of five sires averaged under half that. All older proven sires, these were: Darley Kentucky's Medaglia d'Oro, Juddmonte's Dansili, WinStar's Speightstown, the Irish National Stud's Invincible Spirit, and Darley Kildangan's Shamardal–again, three European, two American. But the next four on average, the most up-and-coming younger proven sires (three living) are all American: Coolmore Ashford's deceased Scat Daddy, Hill 'n' Dale's Curlin, WinStar's Pioneerof the Nile, and Ashford's Uncle Mo. They are probably two separate lists anyway, European sires and North American sires, with the occasional 'crossover' War Front or Scat Daddy. Gilltown's Sea The Stars (#19 by 2016 yearling sire average – $192,074) and Frankel are the leading 'younger' proven sires in Europe (well, Frankel will be in a few months, when his 3-year-olds run); Curlin, Pioneerof The Nile, and Uncle Mo are the top younger proven sires in the States. Note all will be standing for six-figure fees in 2017.

Behind Frankel, among Freshman sires which had their first 2-year-olds in 2016, Australian Champion Sire Redoute's Choice, with his second Northern Hemisphere crop, finished second among NH F2014 sires with 18 yearlings averaging $140,125; Lane's End's Union Rags, who is in a ding-dong battle with Darby Dan's Dialed In for leading North American Freshman Sire, was the top US F2014 sire by yearling average, with 59 yearlings averaging $99,989. Among 'sophomore' sires (F2013, first 3-year-olds 2016), Uncle Mo was the only one to have a six-figure yearling average; Coolmore's Zoffany was a distant second in that group, with 67 yearlings averaging $68,633.

Top first-year NA/EU sire at the sales by yearling average (click here) was Oakgrove Stud's Al Kazeem (Dubawi), who originally retired to the Royal Studs, where this small crop was sired, before being returned to training as sub-fertile, but covered again in 2016 at Oakgrove. Seven yearlings from that first small crop averaged $180,700, which made him leading first-year sire by average. Three Europeans (arguably four) filled the next slots: Coolmore's Camelot (Montjeu) had 88 yearlings sell for an average of $136,798; the Haras Du Quesnay's Intello (Galileo), from the first of two crops sired at Cheveley Park in England, averaged $132,290, with 53 yearlings sold; Darley Kildangan's Dawn Approach (New Approach) had 42 average $121,814; and Declaration of War (War Front), who stood his first season at Coolmore in Ireland, but then moved to Ashford in Kentucky, had 77 yearlings from his Irish-sired crop average $119,785. Claiborne's Orb (Malibu Moon) topped North American sires, with 55 yearlings averaging $148,318 (an impressive mark nearly six times his stud fee, which was and is $25,000), followed by Ashford's Shanghai Bobby (Harlan's Holiday, 64 averaged $115,804); Calumet's Oxbow (Awesome Again, 24 averaged $111,129); and Darley Jonabell's Animal Kingdom (Leroidesanimaux, 50 averaged $99,388).

Among sires with their first weanlings selling at the mixed sales, the leaders by average (click here) were: Juddmonte's Kingman (Invincible Spirit, 7 averaged $288,855); Coolmore's Australia (Galileo, 7 averaged $148,668); Three Chimneys' Will Take Charge (Unbridled's Song, 18 averaged $128,444); and Airdrie's new 'market darling' Cairo Prince (Pioneerof The Nile, 20 averaged $87,750). Among sires with their first mares sold in-foal, WinStar's Constitution (Tapit) topped all sires with seven mares in foal averaging $508,142 (click here), but one of those was Ithinkisawapudycat, dam of GI Spinaway S. dead-heat winner Sweet Loretta, who brought $2.2-million at Keeneland; the other six mares in foal to him did still average $226,166. Ashford's American Pharoah (Pioneerof the Nile) had 10 mares in foal average $440,000; and three European sires had in-foal averages over $300,000: Shadwell's Muhaarar (Oasis Dream, 6 averaged $396,432); Ashford's Gleneagles (Galileo, 6 averaged $318,677); and Darley Dalham Hall's Golden Horn (Cape Cross, 7 averaged $310,295).

Contact Bill Oppenheim at bopp@erb.com (cc suefinley@thetdn.com).