Thursday, April 18, 2013

Any Meaning in the Two-Year-Old sales?

Now that the boutique sales of two-year-olds in training are over, and the middle-market and lower-end sales are about to get underway, perhaps it’s time to take a look at the sales numbers and see if all the optimistic statements about market recovery have any more validity than, say, European politicians’ repeated insistence that just a little more austerity will bring the confidence fairy right back. It’s the business of those politicians to keep telling voters that recovery is just around the corner, and it’s the business of the executives at Fasig-Tipton, Keeneland and Ocala Breeders’ Sales Co. to assure their constituency – thoroughbred breeders and consignors – to hang in there for just one more round of (literally) betting the farm.

But, as in the case of economic recovery in general, after a reasonable number of years, it makes sense to look at what’s actually happened since the worldwide economic crash in 2008. What strategies have worked, what haven’t, and what’s the outlook for the future.

To get to some of the answers, I looked at the results from the three high-level sales of two-year-olds in training: the Fasig-Tipton Florida (formerly Calder) Sale, the OBS March (formerly February) sale, and the Keeneland April sale. I left out the Barrett’s sale in Southern California because, frankly, I don’t know very much about that market and besides, it’s a long way away.

For those who want to check the figures or do their own analyses, you can find Fasig-Tipton’s auction results here, Keeneland’s here, and OBS Sales’ here

Fasig-Tipton has for many years been the pre-eminent two-year-old sale. That’s where Demi O’Byrne of Coolmore and John Ferguson for Sheikh Mohammed battled in 2006 to a $16 million hammer price for the spectacularly unsuccessful The Green Monkey. The Green Monkey, for those who might have forgotten, ran an eighth of a mile at the sale's under-tack show in the then-astounding time of 9 4/5ths seconds, never won a race and retired ignominiously to stud in Florida, where he’s standing for the princely sum of $5,000 and is so little thought of that he doesn’t even have a page in the Blood-Horse Stallion Directory.

In any event, Fasig-Tipton Florida has been where the big spenders in the game go to find stakes horses. In 2008, before economic ruin was apparent, the Calder sale catalogued 270 horses, of which 102 (37.8%) were sold, at an average price of $344,000 and a median of $230,000. A year later, in 2009, that catalogue was roughly the same size, 272 horses, and 111 sold (40.8%), but the average and median plunged sharply, to $236,000 and $150,000 respectively. At that point, Fasig-Tipton took a first small step toward downsizing, cutting the size of its catalogue to around 240 in 2010 and 2011, as well as moving the sale from its traditional location at Calder to the Palm Meadows training center in Palm Beach County in 2011. Those moves stabilized median and average prices, but by 2011 the number of horses sold had declined to 87, a mere 36% of those listed in the catalogue. The rest were either scratched from the sale or failed to meet their reserves.

Fasig-Tipton made even more aggressive downsizing moves in 2012 and 2013, cutting the catalogue to 167 horses last year and just 136 this year – exactly half of what it had been back in 2008-09. And the number of horses sold declined in tandem, to only 46 this year, or 33.8% of those catalogued. The result was a strong recovery in the median and average prices, which reached $320,000 and $385,000, respectively, at last month’s sale. But when only 46 horses sell, it’s hard to see the sale as any sort of an indicator for the industry as a whole.

Keeneland’s April sale of two-year-olds in training, held just last week, tells a slightly different story. Back in 2008-09, Keeneland April was a true boutique, listing barely 100 horses for sale each year. When, in 2009, fewer than 30% of the catalogue actually sold, Keeneland’s response was the opposite of Fasig-Tipton’s. Keeneland expanded the catalogue in 2010, nearly doubling its size to 181 horses. Predictably, median and average suffered with the expansion, but Keeneland has managed to double the number of horses sold each year from the nadir of 2009. In this year’s catalogue of 137 horses, 59, or 43.1%, actually sold last week. That’s a higher percentage sold than the Fasig-Tipton Florida sale has achieved in any of the past six years. And median and average prices at Keeneland this year were $$150,000 and $197,000, respectively. Not up to the hedge-fund level at the Florida sale, but close to where Keeneland’s two-year-old sale was back in 2008, before the economic crisis.

For those of us who made it through Economics 101, Keeneland’s approach looks paradoxical. When demand shrinks, as it certainly did after 2008, the natural response is to reduce supply. But Keeneland has maintained a small but reliable sale by increasing supply (though cutting back some in this year’s catalog). Perhaps the 50% cutback at the Fasig-Tipton Florida sale created an opening for quality horses that Keeneland was only too happy to fill.

Interpreting the OBS Sales Co. data is trickier. Through 2010, OBS ran the first two-year-old sale of the season, a high-end one-day event in Ocala that preceded the marquee Fasig-Tipton event. Beginning in 2011, though, OBS Sales dropped the February sale and used its two-day March sale, which followed Fasig-Tipton, as its premier event. So the number of horses offered for sale can’t be compared across the two time periods. From 2008-10, OBS’s one-day February catalogue listed between 160 and 200 horses; from 2011-13, the two-day March catalogue dropped from 490 in 2011 to 345 this year, mirroring the decline in Fasig-Tipton’s numbers.And, as at Fasig-Tipton, the reduction in catalogue size had the (presumably) intended effect of stabilizing the average sale price, which was $157,000 this year, almost matching the 2008 level for the February sale, and substantially exceeding the average for any of the intervening years.

Additionally, more of the horses in the catalogue actually sell at OBS than at either Fasig-Tipton or Keeneland; since OBS dropped the February sale in 2011, between 48% and 54% of each year’s March catalogue has actually sold, compared to numbers around 40% for Keeneland and in the mid-30% range for Fasig-Tipton.

What to make of all this? While there will probably never be another bout of collective insanity like the one that resulted in Demi O’Byrne’s $16 million bid for The Green Monkey back in 2006, there still is a strong market for a few hundred horses that well-heeled buyers pick up at the two-year-old sales as a shortcut to the Kentucky Derby and graded stakes in general. But those few hundred horses are only a percent or two of the 22,500 foals now being born each year, a number that is itself a drop of about one-third from the foal crops of the early and mid-2000s. The top of the two-year-old market is very rarified air indeed. While the sales companies have figured out strategies that saved them from ruin in the wake of the 2008 financial crisis – and they deserve a lot of credit for doing that – these boutique sales  tell us almost nothing about the overall state of the thoroughbred marketplace.

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