3.1. Trends in Sales Prices and Profitability, 2001–2018
depicts inflation-adjusted average and median sales prices from 2001–2018. Inspection of Figure 1
highlights the impact of the Great Recession in 2008 and 2009 on prices in the Thoroughbred yearling market. Mean prices fell by about 40% while median price fell by nearly 50%.
presents average nominal profit, average inflation-adjusted profit in 2018 dollars, and the percentage of profitable sales annually from 2001 to 2018. Overall, under the assumption of low production costs, 44.4% of yearling sales were profitable, while under the assumption of high production costs, 36.1% of all yearling sales were profitable. In 2009 and 2010, average profit was negative under the assumption of high production costs.
illustrates the percentage of profitable sales under the assumption of both low and high production costs for the same time period. The two years following the start of the Great Recession demonstrate the lowest proportion of profitable transactions (2009 and 2010), while 2013, which was a few years into the recovery, exhibited the largest percentage of profitable transactions. 2013 and 2014 were the only years in which more than half of the transactions were profitable when assuming low production costs. With the exception of years spanning the Great Recession and its recovery, the percent of profitable transactions appear to remain relatively constant.
For the remainder of the paper, to err on the side of not underestimating profit, all further analyses are conducted under the assumption of low production costs ($20,000).
and Figure 4
illustrate estimated inflation-adjusted profit at the 99th, 95th, and 75th percentiles (Figure 3
) as well as the 50th, 25th, and 5th percentiles (Figure 4
). While there may be positive economic returns on average in a given year, this exercise demonstrates that with the exception of 2013 and 2014, median profit for breeders was estimated to be negative. In other words, a few especially lucrative transactions may yield an overall positive return enough though fewer than 50% of transactions are profitable. Moreover, Figure 4
illustrates sizable losses incurred by many breeders in the aftermath of the Great Recession.
What follows examines inflation-adjusted median profit and percentage of profitable transactions by stud fee category. The industry typically considers “commercial sires” to be those with advertised stud fees of at least $
25,000 (some industry sources consider stallions with stud fees of $
15,000 and above to be commercial, but our analysis shows that fewer than half of transactions in this category were profitable). Figure 5
and Figure 6
present inflation-adjusted median profit for commercial and non-commercial sires, respectively. The differences in the two figures is unmistakable. Figure 5
suggests that median profit is nearly always positive for yearlings by commercial sires and that the largest median profit is earned by yearlings with the highest quality sires (notably, though, when the economy experiences downturns such as the Great Recession, those breeders also stand to lose the most). In contrast, Figure 6
illustrates nearly guaranteed negative median profit across all categories of non-commercial sires. Together, Figure 5
and Figure 6
tell the story of a polarized market in which the best quality individuals are in high demand, but demand for individuals falling short of that ideal is weak.
Next, Table 3
presents the percentage of profitable transactions by stud fee. From 2001 to 2018, over 45% of the yearlings sold were by “commercial” sires. The percentage of profitable sales is monotonically decreasing from the highest stud fee category (57.6%) to the lowest (19.7%). Breeders with the initial means to invest in a higher quality stallion based on advertised stud fee stand a greater chance of realizing positive economic returns.
and Figure 8
illustrate percentage of profitable transactions among yearlings by commercial sires and non-commercial sires, respectively, from 2001 to 2018. For most years, investing in the top tier of stallions (stud fees of $
100,000 and up) resulted in the greatest percentage of profitable sales, although there are a few exceptions. The largest deviations occurred in the years following the Great Recession, where breeders paid peak stud fees but experienced significant declines in prices. Yearlings by sires in the lowest stud fees of the commercial sires ($
49,999) appear to have the most predictable pattern of profitable sales, exhibiting less extreme deviations in times of boom or bust. Figure 6
depicts the same measure for yearlings by non-commercial sires. While the percentage of profitable sales is generally decreasing from higher stud fees to lower ones, there is significant variability in these measures from year to year. In addition, there were no profitable transactions in 2010 in the lowest stud fee category, even under the assumption of low production costs.
Based on this analysis, a few key points are evident. Perhaps the most remarkable is that even under the assumption of low production costs, fewer than half of the transactions are profitable in all but two of the years under analysis. Moreover, estimated median profit is negative for all years but one. Given the concerns on profitability from the British Thoroughbred Breeders’ Association study, this is troubling for the sustainability of smaller breeders who may not have the capital to invest in higher quality stallions. In the next section, we investigate changes to our assumptions that may lead us to underestimate profit.
3.2. Implied Stud Fee Discount
In the estimation of profit, we had to make a few assumptions. First, we do not have access to actual production costs, so we identify two plausible levels in consultation with farm managers. Even assuming the low level of production costs, in general, fewer than 50% of profitable sales does not seem to be economically sustainable in the long run. So, while commission fees are generally fairly standard, our implicit assumption that breeders pay the advertised stud fee may be erroneous. A discount on the advertised stud fee may exist in many forms. Beyond a direct discount, breeders may receive discounted stud fees by breeding multiple mares to the same stallion or at the same farm, participating in foal-share partnerships with the stallion farm, purchasing a syndicate share, participating in incentive programs or risk-sharing programs, and so on. Because such a discount may exist in many forms, we estimate the implied direct stud fee discount that must exist in order to generate 50% or 67% profitable transactions using Goal Seek in Excel. The results are intended to capture the value of the discount that the breeder receives relative to the advertised stud fee, regardless of the form the discount actually takes. Moreover, in spite of this exercise, it is important to note that in some years, breeders certainly did not achieve the threshold of profitable sales even with any type of accommodation from the stallion owner.
presents the minimum annual implied stud fee discount required to achieve at least 50% or 67% profitable sales. The discount peaked in 2009 and 2010 where the discounts exceeded 80% (for 50% profitable transactions) and 100% (for 67% profitable transactions), and was minimized in 2013 and 2014, where no discount was necessary to achieve the threshold of 50% profitable transactions.
and Figure 11
investigate this issue further by allowing the implied discount to differ across stud fee categories. Generally, demand is stronger for sires with higher stud fees. Therefore, fewer incentives are needed to attract mares. However, sires with lower stud fees are less desirable and may require greater enticements to attract breeders. For this analysis, we only consider the 50% profitability threshold. Figure 10
presents the annual implied stud fee discount for commercial sires, while Figure 11
presents the implied discount for non-commercial sires.
suggests that among commercial sires, in most years, no implied discount was required to achieve 50% profitable transactions even though there were very few years in which no discount was required to achieve 67% profitable transactions.
demonstrates a much different result. For the bottom two stud fee categories, the implied stud fee discount is over 100%, indicating that even if the stud fee was waived, the transaction would still not have been profitable. So, even if there are breeders raising yearlings on a “shoestring” budget, realizing a positive economic return is unlikely. With a few exceptions, the implied discount was always greater than 0%, and often above 50%. Taken together, these results suggest that selling yearlings by non-commercial sires is not likely to be a profitable venture.