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.

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