Weathering the Storm: Gray Lyster

While many questions regarding the Coronavirus pandemic remain unanswered, and with a stock market experiencing extreme volatility, there is continued uncertainty as to what could happen in our industry over the next few years. But many people in the industry have been through such ambiguity before. We sought the advice of industry leaders who successfully made their way through the Great Recession of 2008, and we asked what they learned from it and how they will use their experiences to guide them through the coming years.

GRAY LYSTER, Ashview Farm

Looking at the bigger picture of weathering this storm from the standpoint of a commercial breeder, unfortunately we can't really change what we're producing right this second. It's like we're mid-stride on producing a product–whether it's a pregnant mare, a mare we have a contract on, the foal by her side, or even a yearling. We have no choice but to continue onward. For us, some of the bigger decisions will be made in the future when it comes to purchasing broodmares or broodmare prospects, or when we decide what to sell later this year.

The tough thing for breeders is that right now when there's a market that potentially falls off but we don't yet know to what degree, we've already got three years of input costs with stallion fees at the pre-Coronavirus levels. We've already paid stud fees on two crops and have signed contracts on a third. When you catch a market on the come is where you've got potential for reward. Looking back to the 2008 recession, if you were signing contracts in 2009 through 2011, hopefully you were able to reap those benefits in 2013 to 2015. But in 2008 and again right now, it's like we're swallowing this big pill, and it's not even half-way down our throat. So to succeed, we have to be really choosey and take advantage of every opportunity.

We're all nervous. All of our costs have continued to go up. For me on the operation side, I have more costs this spring on extra safety measures and spreading staff out, which becomes less efficient. All those things make margins thinner and thinner, but hopefully there's still a positive margin this year.

There are two big things I learned in 2008 that I can use during this time of economic uncertainty. One is from a misinterpretation I made and another from a decision that turned out to be profitable.

One specific mistake I made when 2008 hit was that I had this market forecast idea where I thought the market would trend towards the middle-market proven stallions. I thought that when the market falls off, nobody would want these first-year sires. And I was so dead wrong it wasn't even funny. It really taught me a lesson. It was the complete opposite; the market still demanded the unknown stallions that potentially have big upside. As a commercial breeder, I learned the market still demands the newer product. So next year, I will be looking at first-year sires.

I would expect that next year some stud fees will have to come down, but at the same time we're all breeding to the same in-demand horses and the higher-level stuff will probably hold its value a lot better than the lower level. For some of the lower level stallions, you can't drop them enough to get people to breed to them as it is.

During the fallout of 2008, we made some nice purchases. We were lucky in the sense that we had some capital to make those purchases. We got some nice mares that I think we made 50 cents on the dollar for based on what they were worth the year before or a few years later. We sold some nice yearlings and made a lot of money in the next decade off of those purchases.

I think it's important for a commercial breeder who is going to make it through these next years to keep some dry powder for some purchasing, no matter what. We were losing money on a lot of products that we were selling in 2009 through 2011, but there were some unbelievable deals to be had on broodmares. So it's easy to advise on keeping some dry powder, but if there's no excess capital for purchasing, you have to work with what you have. On the other hand, if you do have extra and you think this is going to be a couple-year lag, there's probably going to be some really nice opportunities for broodmares.

On a bigger scale, I think there will be opportunities to take advantage of in all the markets. I think all buyers in this for the long haul really need to pay attention to two-year-old sales, yearling sales, foal sales, and broodmare sales because there's going to be some nice horses that people can't protect with reserves like they have in the past. They're going to have to raise capital and sell horses and not be as aggressive with reserves. That's going to make for some real opportunities.

I usually buy broodmare prospects off the track privately throughout the year, and now we're going to have to be really careful on appraising. It's sort of a guessing game, but there may be some really good buying opportunities if the market is off a little less than everyone thinks. But we have to be careful not to get carried away and purchase on breeding stock sales of 2019 prices, because there's no question that we will be off.

From a selling standpoint, I offer the same number of yearlings whether it's a good year or a bad year, so I don't think I'll be holding any extra horses to race this fall. Normally we sell almost everything. The ones we race are the ones that have specific things that prohibit them from selling, which isn't dictated by the market. If I am unable to get yearlings sold this year, I could see myself going into the two-year-old market next year in hopes that the market looks different by then.

My advice to commercial breeders would be to work the sales really hard and become a good appraiser for yourself. In all markets, there's opportunity. If you're a good appraiser of good value, you can really find an opportunity to make money on the commercial breeding side.