Saturday, February 25, 2017

How the 2YO Sales Fit Into Today's Racing Economy

Last week I pulled together a statistical overview of the two-year-old thoroughbred sales market. With the first breeze show of 2017 scheduled for Monday at Gulfstream, and the first 2YO sale set for Wednesday, here’s some context for those statistics and four thoughts about the future of the juvenile sales in light of overall trends in racing.

First, the 2YO sales scene has not shrunk at the same pace as the foal crop since the 2008 financial crisis. In 2005 – foals that could be offered at the 2007 2YO sales – the North American foal crop was just over 35,000. In 2014 – foals that could have been offered at the 2016 2YO sales – the foal crop was 20,450. That’s a decline of 42% in a decade. In contrast, the major 2YO auction houses (then including Keeneland) offered a total of just over 4,000 horses in 2016, compared to 4,800 in 2007, a decline of only about 17%.

That means the 2YO sales are presenting a bigger fraction of the total thoroughbred foal crop than before the financial meltdown. A decade ago, roughly one of every seven horses was catalogued in a 2YO sale; today, it’s more like one in five. That could mean that more end-users (i.e., owners who actually want to race horses) are using the juvenile auctions, but it also means that the sales catalogs contain more horses with lesser potential. If you are taking more of less, than the quality of what you are taking must have gone down. If 2YO sales had moved in proportion to changes in the foal crop over the past decade, we would now be seeing only about 2,800 in the catalogs, and not the 4,000 we can expect by the time all this year’s sales are done. Not surprising, then, that the number of horses sold as a percentage of catalog size has fallen off. It is time for the auction houses to start exercising a little quality control and shrink the catalogs.

Second, the 2YO market has been vastly simplified. A decade ago, OBS ran five sales, Fasig-Tipton five, Barrett’s two and Keeneland one. That’s now been consolidated into the two F-T sales and the three big OBS offerings, plus two at Barrett’s in California. That makes life simpler for consignors and buyers and probably cuts transaction costs, which are ultimately passed on to racehorse owners. (Though we still need better policing to make sure that so-called “bloodstock agents” don’t cheat owners and consignors by insisting on kickbacks from the latter while passing on an inflated price to the former. You guys know who you are.)

Third, we are still in thrall to the stopwatch. Yes, it’s true, as my friend Jeff Seder of EQB, Inc., and others have proven, that horses that breeze faster have, in the aggregate, more success on the racetrack than breeze show slowpokes. But is there really that much difference between a horse that breezes a furlong in 9.3 seconds compared to one breezing in 9.4? And how many of those horses listed in the catalogs but then scratched before the sale were victims of the aggressive training needed to get them ready for the sales ring? Anecdotal, to be sure, but my Castle Village Farm partnership owns a nice Broken Vow two-year-old of 2016 who might have fetched $75,000 at Timonium last year had he not bucked shins. We bought him privately for $25,000 and he’ll debut as a three-year-old next month; looks like he could be a useful horse, and he would have been better off not being rushed.

Finally, one must think about the place of these sales in the overall economy of racing. The basic economics are simple: someone breeds a horse and either races it or sells it. The person who races the horse pays the bills and gets the purse, and, sometimes, a return from breeding. Basically, that’s all the money there is, and as we all know, it’s not enough. Most horses don’t earn enough to pay for their training, let alone their purchase or breeding cost. Most owners lose money, which is pretty much the way it’s always been; being in the winners circle makes up for the cost of a lot of hay. For some rich folks, escorting a horse into a Grade 1 winners circle is more of a thrill than escorting an East European model into a charity ball.

But where does the money to pay for all the sales apparatus come from? The auction houses, the bloodstock agents and the sales vets all are getting paid, and ultimately that cost is coming from breeders and owners. In fact, that’s why the Florida breeders set up OBS in the first place, to capture some of that transaction cost for themselves. Today, with handle and purses flat in current dollars and in long-term decline when inflation-adjusted, there’s just less money to go around. Scaling back the 2YO sales would be a modest step in the direction of recognizing that reality.

Friday, February 17, 2017

Two-Year-Old Sale Season Ahead

It's almost time for the annual two-year-old sale season. Fast-Tipton's Florida sale at Gulfstream on March 1st kicks off the season and almost always -- at least since the demise of Keeneland's boutique spring sale after 2014 -- promises the biggest prices and most spectacular bidding wars. Some of us still remember that sale (then held at Calder) in 2006, when Demi O'Byrne of Coolmore and John Ferguson of Godolphin compared penises -- oops, bankrolls -- and Ferguson won by cleverly letting Demi make the last bid, for $16 million. For those who may have forgotten this legendary horse, The Green Monkey started three times for Coolmore, never won a race and was ignominiously retired to stud in Florida for a princely fee of $5,000.

That fiasco aside, two-year-old sales have achieved an ongoing place in the racing business. While the most elegantly bred horses offered for sale tend to go to "end users" at the yearling sales, those who are looking for a decent racehorse and can't afford the cream of the crop will often turn up for the two-year-olds. At these sales, we can see the horses run, get better odds that they'll actually make it to the races, and not need to depend so much on Wayne Lukas's famed ability to "see the cat" or, in other words, to look at a yearling and imagine the racehorse that it would develop into.We're willing to pay a bit of a premium for having someone else, typically a pinhooker, bring the horse along through its K-6 education, in exchange for the additional information we can get.

Last year, roughly 2,000 two-year-olds were sold through the three big sales companies in the market: Fasig-Tipton, Barrett's and Ocala Breeders sales. The catalogs for those sales -- three at OBS, two each for Barrett's and Fasig-Tipton, included more than 4,000 hip numbers, so just over 50% of the horses listed failed to sell, whether as a result of scratches or because they failed to meet their reserve (RNAs). Those are much smaller numbers than the annual yearling sales, where more than a quarter of the previous year's foal crop is offered, but still significant. So let's take a look at recent sales and see where the market might be headed this year.

Of the three sales companies in the two-year-old market, OBS dominates the numbers, with over 3,000 of the 4,000 horses catalogued the last couple of years and over 1,500 of the 2,000 horses sold. OBS runs three sales, an upper-end sale in March and big follow-up sales in April and June. Over the past three years, those sales have been pretty stable. The median price at the March sale has wandered just north of $100,000, while the April sale median has been in a narrow band around $45,000. The June sale, however, has been in a bit of a decline, with the median dropping from $20,000 in 2014 to just $13,000 last year, and for the first time last year, fewer than half the horses in the catalog were sold. The bottom of the market, whether that's the market for mares, yearlings or two-year-olds, is weak, and in the case of two-year-olds, that bottom is almost entirely the OBS June sale. I wouldn't be surprised to see it cut back in size soon, from its current level of around 1,200 horses catalogued each year.

Out in California, Barrett's maintains its small, if regionally significant, market, though with more Asian buyers heading east and California racing in a death spiral, there are signs that the sale may not be viable in the long run. In 2014, Barrett's catalogued 281 horses across its two sales, in March and May, and sold 130 of them, with medians of $112,500 in March and $30,000 in May. By last year, the catalog was down a bit, to 268, but sales were down even more, to 106, and the two sales' median prices had dropped to $27,000 for May and $100,000 for March. With significantly less than 10% of the national two-year-old market, equal to less than 1% of the foal crop, Barrett's may be an idea whose time has passed.

In contrast to the wholesale approach of OBS, Fasig-Tipton fills two specific niches in the overall two-year. Its Florida sale in March is the unquestioned top of the market, and its May sale at the Timonium fairgrounds north of Baltimore is a must-go destination for blue-collar Mid-Atlantic and New York horsemen seeking to fill out this barns for the summer and beyond.

There's been no consistent trend in the Florida sale the last few years. The catalog listed 157 horses in 2014, ballooned to 175 in 2015, then dropped back to 154 last year. The number sold was a very weak 47 in 2014, nearly doubled to 89 in 20156, and dropped back to 66 last year. And the median price, at $180,000 in 2014, dropped to $130,000 on the larger catalog in 2015, then rebounded to $250,000 last year. The top of the market, at any rate, doesn't seem to be experiencing the continuing decline evident at the bottom.

The much larger F-T Midlantic sale at Timonium has also been erratic, but not at all in synch with the high-end Florida sale. Catalog size was 580 in 2014, 490 in 2015, and back up to 597 last year, with the number sold holding above 50% of the catalog in all three years. The median price was $31,000 in 2014, jumped to $45,000 on the smaller catalog in 2015, then fell back to $32,000 last year.  Considering the amount of money that's gone into horses by May, including stud fees and training costs to get to the sales, no one's getting rich on that $32,000.

With only two of the catalogs for the 2017 season even available yet, it's too early to make any firm predictions. But the auction houses, and, by inference, breeders and pinhookers, seem optimistic. Fasig-Tipton has catalogued 162 horses -- a few more than last year --for its marquee Florida sale in March,. And OBS has 677 in the catalog for its first sale in March, up about 10% from the level of the past two years. Assuming that Donald Trump hasn't brought about the end of the world by next month, we'll see if that optimism is justified.