Stud Fees Central To Correcting November Polarization

So we're hearing it at last: the dreaded “C” word. Correction.

After a bull run as long as the one we've seen in international bloodstock, we're now hearing this and other words chosen to discourage undue alarm. Last week, on the conclusion of their November Sale, Keeneland officials resorted to adjectives as queasy as “pragmatic” and “solid” to describe trade. “Correction” has a bolder implication: that if the market's down, then so it jolly well should be; values had reached an unsustainable high, and have merely been rocked back onto an even keel.

Even if that happens to be true, however, it's only human to hear the word with nervousness. In the cycles of boom and bust, there's always the chance that it is only the beginning of a long period of penitence. In the Lexington neighborhood, indeed, horsemen may associate the whole concept with driving past the nearby Blackburn Correctional Complex.

True, one veteran breeder made me chuckle, as we left one of the auctions staged locally over the past couple of weeks, by declaring that fewer criminals were accommodated in that forbidding institution than in the pavilion behind us. But the fact is that after a frenzied start to the week at Fasig-Tipton, the deeper and wider market across town at Keeneland intimated that our unfettered bull run may finally have come to an end.

A relatively boutique catalogue, like the one staged at Fasig-Tipton, is always a precarious gauge of wider trends, in that its data will be heavily skewed by the successful recruitment and sale of elite mares. But just as Keeneland effectively spans the entire yearling market in September–accounting for $2.08 of every $3 spent on yearlings in America this year–so its breeding stock sale, extending to nine sessions, gave us a far more penetrating sense of where we stand.

Book I at Keeneland more than emulated Fasig's hot trade the previous day, the median catapulting 21.8 percent on 2022, from $275,000 to $335,000. These figures have been updated to include post-sale transactions, of which there were plenty: 21 out of 141, compared with just six of 142 the previous year. That strongly corroborates the suspicion that fireworks at Fasig the previous day (nine-figure turnover that was virtually unchanged, only from fewer horses, yielding rises of 18 and 10.4 percent respectively in median and average) had emboldened some ambitious reserves. Keeneland's Book I average was admittedly down seven percent, from $482,606 to $448,511, but the inclusion last year of a $4.6 million Flightline share had much to do with that. (Without that exotic offering, the 2022 average would have been $453,404.)

One way or another, then, the two elite sessions either side of town showed that the top end remains extremely strong, the median at both smashing what had seemed very robust yields the previous year. But it turned out that the rest of the Keeneland market would somewhat match the weather: a bewildering 81 degrees on the opening Wednesday, reverting to 36 degrees by dawn on Saturday. By the end of the sale, an increasingly familiar narrative of polarization had been reinforced.

Now things were actually nothing like as alarming as appeared the case when Keeneland issued its own data at the close of the sale. This initially indicated a slump in the overall median as steep as 20 percent, and 17 percent in the average.

Given the panic this must have caused many people, it was startling to discover that this data only measured the nine sessions staged this year against what had only been the first nine in 2022–when a similar volume of horses, in the overall catalogue, had actually been distributed across a 10th day of trade. In other words, the data omitted the weakest element of the whole 2022 sale, which naturally diluted the median: from $40,000 after nine sessions last year, to $35,000 after completion of the extra day. Updated to compare the two completed sales, the median had slipped far less seriously, from $35,000 to $32,000. As a headline figure, a drop of 8.6 percent should prompt much less unease than one of 20 percent.

The initial report on the average proved similarly misleading. By meanwhile incorporating not only the omitted session that completed the 2022 sale, but also post-sale trade, the overall sale average was down no more than 8.5 percent from $92,928 to $85,048. Nothing like as drastic, again, as had been haplessly relayed by the press on the close of the sale.

Pretty cold comfort, no doubt, for many. Putting that avoidable muddle to one side, the tables below show that top quality is still commanding top dollar, but that the going is indeed tougher away from that rarefied zone. For by combining Fasig and Keeneland Book I turnover–a useful exercise, for historic comparisons, given the way the Fasig auction has grown in recent years–and breaking off the rest of the Keeneland catalogue, we see that the former eked out a 2.5 percent gain in average ($557,698 from $544,292) even on last year's vintage trade. In contrast the average through remainder of the Keeneland catalogue shed 10.7 percent, from $67,627 to $60,421.

But let's keep that in perspective. If we rewind to before the 2020 pandemic, we see that the typical commercial experience for those operating after Book I (the majority, obviously) remains pretty healthy. In 2019, their average transaction was $51,352 at a clearance of 77.6 percent. This year, it was $60,421 at 81.8 percent. Nor has the relative performance of this sphere lost value relative to the elite market. This year, the average sale after Book I represented 10.8 percent of one in the Fasig/Book I market; in 2019, it was worth…10.8 percent!

Last year, admittedly, the average from Book 2 onward represented 12.4 percent of that set in Fasig/Book 1; and it had weighed in at 11.4 percent in 2021. In 2018, however, it was only 9.8 percent. So the market then was actually a little more polarized than it is today, suggesting that this sector was perhaps more vulnerable to “correction” than the heat in the elite tier might have led us to expect.

None of this trade happens in a vacuum, of course. If you're a pinhooker, a soaring weanling/yearling market means simply that you require the same growth to carry through into the yearling/2-year-old sales to make the same profit. And other costs, of course, are going up all the time. In our recent assessment of what superficially proved a very stable yearling market in North America, we should have stressed that point: if your sales are stable, but inflation is ballooning your overheads, your profits are anything but.

For commercial breeders, the key cost tends to be a covering fee. (And a key differential, too, bearing in mind that keep, labor and veterinary costs are essentially the same for a cheap horse as for an expensive one.) And the stallion farms certainly seem to have been dovetailing their demands to the profits presumed for their clients in recent years.

Now, you can get a legitimate sense of the cost to access a new sire–which is obviously “Main Street” for most commercial breeders–by taking a median fee among the top 10. (Which prevents a Flightline kind of fee skewing the equation.) You can then get a speculative handle on the kind of overall investment you might need, to make your debut as a commercial breeder, by adding that median fee to the average price of a mare (i.e. excluding weanling trade) after Book I at Keeneland.

And the bottom line is that entry into commercial breeding appears rather more intimidating now than it did before the pandemic. In 2019, the median fee for a top 10 freshman was $22,500; last year it was $40,000, and this year $35,000. A mare outside Book I would cost an average $75,709 in 2019, and even in a slower market than last year ($112,505) the equivalent purchase in 2023 was $96,882.

The aggregate mare-plus-cover cost today is therefore 28 percent higher than in 2019. Breeders are supposed to find that out of their own increasing profits, but the rise in average for a Keeneland September yearling in the same period, from $125,201 to $141,489, is only 13 percent. Even what felt like a buyer's market last week, then, will take a long time to alleviate the impact of higher stallion fees. That feels absolutely central to how things may develop from here.

Admittedly this is a fairly random snapshot. Our table shows that you would get markedly different outcomes if you compared 2018 and 2023, say, or 2019 and 2022. And, to be fair to the stallion farms, the cost of a typical commercial cover relative to the price of mares has maintained a remarkably even pitch, given the inevitable fluctuations. In four of the past six years, in fact, it has worked out between 55.2 and 56.6 percent.

Stallion farms also have wider responsibilities, of course, in an age when the foal crop is diminishing even as book sizes soar. That's a debate for another day, however. In this context, let's just take a quick look at the early dividends achieved at the weanling market by the latest intake of young sires.

It must be acknowledged that the agents and advisers tend to be pretty obedient when presented with these debutants: sires launched at the higher fees tend to achieve the highest averages at the sales. Only rarely does a market “discovery” punch above fee.

Sure enough, after their opening skirmishes, the top four spots in the weanling averages have duly been filled, in order, by the sires launched with the first, second, third and joint-fourth highest fees. Albeit from samples of varying size, Essential Quality, Charlatan, Maxfield and Yaupon have so far obliged with an almost mechanical yield: the first three at 4.1, the well-signaled Yaupon (176 live foals!) at 4.4. on those measures it's been a slower start for the next two, Knicks Go and Silver State, but there is an awfully long way to go for all of them.

As for the weanling market overall, the indices at Keeneland were generally positive. The average achieved from a rather smaller offering was, to a nearly freakish degree, virtually identical to last year. True, that was powered this time round by more demand at the top end: there were 19 hips sold at $400,000 or more, up from 10 last year. The median was duly down somewhat, and considerably so on 2021, when fewer sales at the top end translated into a very strong median as well as a competitive average.

Again, however, trade remains much healthier than before the pandemic: average (up 15.6 percent), median (up 40 percent) and clearance (79.1 percent from 73 percent) all remain significantly ahead of 2019; and comfortably in front, as well, even of what had been a stronger sale the previous year.
All in all, then, it feels way too early to relate any slippage in the middle market to the wider economic or political environment. Bloodstock, after all, has proved mysteriously immune to all manner of external provocations in recent years.

Yes, we see plenty going on out there that might affect confidence, and not just in the economy. By this stage, for instance, we are surely all aware that we can't be complacent about the social glamor our sport enjoyed in eras past. But sales of this kind are about the long haul: whether you're a trader trying to build a commercial portfolio, or an end-user striving to underpin your own program.

Such buoyancy at the elite level is no small comfort, then. As for the rest of us mere mortals, it feels like we could primarily do with a break on covering fees. Yes, stallions are expensive to recruit, and their window of opportunity is cruelly brief. But if the sales ring is really facing one, then it may be the stallion farms that must next embrace a “correction.”