Monday, September 21, 2009

Why Are We in This Business?

As everyone in the racing business knows by now, prices for race horses have dropped precipitously over the past year. At the current Keeneland yearling sale, both the average and median prices are off between 30-35% as compared to last year. It's now possible -- as it has not been for the past few years, to obtain high-quality racing prospects at what seems, by historical standards, to be a fair price.

But, in fact, even if one buys at those fair prices, the game is still stacked against the owner who actually wants to make money by owning race horses. Despite the increasing saturation of race track-based slot machines, purses have stagnated and even declined, while the cost of doing business steadily increases.

Let's look at a couple of examples to see how succesful a horse has to be on the track for its owner to break even.

First, let's look at a typical high-end yearling purchase, say for $250,000. That's not the top of the market, but it's a lot more than I tend to carry around in my wallet for impulse purchases.

On top of the $250,000 puchase price, we need to add about 5% for a commission to the bloodstock agent; you wouldn't buy a horse at that level without expert advice. That's $12,500. Throw in another $7,500 for sale expenses, including vetting all the horses that you end up not buying. Then there's insurance, which you'd want on an expensive horse. Probably $45,000 to the end of its 4-year0old year, or about 6% of the insured value annually.

Then we send the horse to Florida for breaking and preliminary training, before sending him back north (let's say Saratoga) in the middle of his two-year-old year. That's another $20,000 for training and vet, plus about $4,000 for all the increasingly expensive van rides. So far, we're up to $339,000.

Now, let's add in training the horse at the track from August of its two-year-old year through the end of its four-year-old year. We'll hire a top-level trainer, at say $125 a day, and, even if we try to manage vet costs, they won't be less than $500 a month. So, training and vet costs to the end of the four-year-old season are another $125,000. All together, we've spent about $464,000 to get the horse that far.

So, how much does the horse need to earn on the track to break even? A lot more than $464,000. The trainer gets at least 10%, and, increasingly, more like 12% of earnings; the jockey gets on average another 7%, and, at least if you race in New York, another 3% or so goes for a variety of mandatory deductions. So we have to gross up the required earnings to get back to our net target of $464,000. In fact, we'd need to earn almost $600,000 in purses just to break even.

Sure, there's some possibility of residual stallion or broodmare value at this level, but in the current market, and discounting for the time value of whatever money might come in down the road, that isn't going to be much. If we're looking at making a profit on the race track, we need that $600,000. And how many horses earn that much?

Now let's take a more modest example. Say we buy a decent New York-bred yearling for $35,000. We won't bother with a bloodstock adviser, and we'll skip the insurance. And we'll probably be tougher on the vet expenses, and place the horse with a trainer whose day rate is more like $100 a day. Using those parameters, it'll cost us a total of $80,000, including the purchase price, to get our $35,000 yearling to the end of its two-year-old year, assuming we send it to the track in August, and another $88,000 for two years of training and vet bills. So, by the end of its four-year-old year, we've spent $168,000.

Applying the same formula to gross up the earnings for trainers' and jockeys' percentages, we'd need purse earnings of $215,000 to get even on our $35,000 yearling. I've had a few horses that did that well, but it's not an everyday occurrence. Look at the lifetime earnings for horses running in New York and you won't see that many above $200,000.

And all these projections don't include all the little extra costs that go with being an owner, from lunches for friends at the turf club to, one hopes, lots of win pictures, to stakes nominations, to donations to worthy race track charities.

So, why are we in this business? Because we love horses and have a terrific ability to see the future through the rosiest of rose-colored glasses. It's a great business to be in. Just don't expect to make money.

3 comments:

Tony C. said...

You won't get any argument from me about the hard numbers. However, you fail to take one important variable into account – a variable that far too many owners ignore to the great detriment of their bottom-lines: the secondary market.

Even in the current economic climate, horses that break their maidens in good style (and/or in a fast time) usually attract outsized offers. Most owners, including those who are not exceptionally wealthy, prefer to follow the dream, rather than making the rational business decision.

That is fine as far as it goes, but the point is that horses need not earn back their purchase prices and expenses by winning million dollar races. A well managed runner and timely sale can help owners achieve those goals.

Steve Zorn said...

Tony:

I agree that's a real possibility for some maiden winners, though I wonder what the numbers really are. Of the, let's say, 15,000 maiden winners each year, how many of them attract 6-figure offers? Maybe 100? A friend whose $35,000 yearling won a maiden at Saratoga this year got a $150,000 offer (which, preferring to chase the dream himself, he turned down), but it doesn't happen often enough, I suspect, to have any impact on the overall numbers.

Tony C. said...

Steve,

I've managed horses for owners on and off for many years, and while obviously anecdotal, I can assure you that the numbers are far, far higher than you imagine.

Very few horses are well-managed to begin with, and given a sound horse with above average ability, it is not difficult to create an opportunity to sell at a considerable profit. In fact, I have been able to put my clients in that position with regularity, though they don't always choose to sell.

I do have the advantage, however, of buying horses in training, rather than yearlings.

One final note: most trainers tend to either consciously or subconsciously sabotage such opportunities, as they tend to be selfish, and (often incorrectly) perceive that it is in their best interests to keep the horse in the barn. This is another reason why many owners fail to achieve better bottom-line results.