Sunday, January 18, 2009

Symptoms of the Times

The Keeneland January 'Horses of all Ages' sale ended with a drop in gross of 53.4% from last year. The steady and steep drop in prices, that started to make itself evident late last summer, is no longer surprising or really even "news," merely a reality of the times. And, I will argue, the best thing that can happen to the industry.

One of the problems in racing is the cost of keeping a horse in training. At many of the best tracks that dollar amount is edging toward or is at about $100 dollars a day. That's before vets, cost of meds, shoes, entry fees etc... That's roughly $36,000 a year before the aforementioned added expenses. Yes, it is 'The Sport of Kings' but we need more than just kings to supply our sport. Kings don't have any interest in running $5,000 claimers, they want Derby horses and can afford to pay for them. The problem that has created, however, has caused a trickle down effect that has hurt the industry.

Let's look at it in terms of the current sub-prime housing market mess. In the Hudson Valley, where I live, on the heels of 9/11 there began a mass exodus out of the city and into the suburbs. White collar workers from the city that could afford to pay much more for houses than they traditionally sold for did just that; they paid more, much more. As a result houses that may have been valued at $x dollars quickly escalated to two or three times their true value. Also to accommodate this boon more and larger houses (fashionable pedigrees) popped up out of the ground on almost every available piece of real estate. That had the effect of escalating housing costs even more. And, of course, property taxes went up to reflect the newly set assessed prices of the houses as well as to accommodate services for the ever growing population. Many that had lived in those areas either moved (predominantly just a little farther north) because they could no longer keep pace with the taxes or because they could now sell their house at record amounts and buy more house elsewhere also at inflated rates. Or they borrowed money against their newly valued pot of gold. Of course the result of 'trading' real estate as though it was a commodity, not a necessity and long term investment, was that for all intents and purposes (in my estimate) the market sapped about 20-25 years of appreciation out of real estate within 5 years. This left many with the glum reality of paying to eventually own (hopefully) what they already possess without much, or any, hope of appreciation. How does this compare to racing?

Think of taxes as the equal of day money, that $100 a day + expenses that is necessary to keep a horse in training. The first thing that happens when someone can't afford to pay that is that they move. In the industry that means they either move their horses to another, less expensive track or get out of the business. But if the price of purses is a reflection of the racing stock then it is already a losing situation to move one's horse from an A track to a B or C track where purses will make it most unlikely that owners can ever break even or better on their investment. We're already lucky in that most people in this business love it enough to endure losses.

I also think we can equate the cost of horses at the sales over the last decade and a half very well to the escalating price of houses caused by people over paying or speculating on houses as short term investments. Many of those in the industry were forced to purchase stock at ever increasing prices just to keep up with the Jones'. This trend was caused predominantly by two forces, as I see it: the wildly escalating cost of the top end of the market dragging all prices upward, and speculators- pinhookers- in the horse industry, gambling on fashionable stock as a short term investment. Also the top or fashionable market has had the result of over-breeding stallions. When a horse (especially a new stallion) covers 150-200 mares two things result. The new fashion will demand more money at the sales but when they fail at the track the depreciation is dramatic because there are so many of the same model.

The elements that in the world at large are slowly turning the landscape in many areas into ghost-towns will have, in my opinion, just the opposite effect in the horse industry. While many breeders are going to take quite a hit for a while, or be forced out of business, those breeders that always had an eye toward producing racing stock are going to see their way out of the woods. And the easing of prices that reflect understandable, reasonable levels of risk will allow many that would have been forced out of racing the ability to continue. A 53.4% (48% avg. 44.1% median) decreased cost at the sales translates to a lot of day money. Of course the top end stock is going to remain out of reach for most. However, many horses that at one time may have been out of reach for many will now become available. Also the escalated risk of speculation will keep pinhookers from buying as high or as many, and that also will have the same result. I think this is a winning situation for the industry.

I know I'm going to get a lot of flack from pinhookers for painting them as part of the problem but to some extent they are. To some extent every middle-man in every industry are good and bad. Good in that they provide a necessary service, bad in that that price rarely truly reflect the benefit of the service.

The only way owners have to mitigate the cost of racing is through purses. In a time when handle is slumping and as a result purses, the return to reasonable prices at market is a welcome recipe for health in the industry.

While I'm hopeful that what some see as a downturn in business will actually result in renewed health more is necessary to keep the industry healthy. And that something is transparency. In the horse industry that means disclosure of any and all procedures a horse has received. Even the car industry has a lemon law! Buyer beware is not good enough when the price and risk of success is already so high. Transparency coerces integrity. It forces honesty when that is not being offered. And this has to be present in this industry more than any other because the sport's very existence is based on the good faith belief by the players that all is legitimate. I believe this has to include the media in the sport as well. We at the TBA have a wonderful arrangement for blog space with the Blood-Horse. However, only months ago a submission of mine was rejected because I railed against some of the practices of the breeding industry. While that is understandable because of where their ad dollars come from it is a bit sad and disappointing. My point wasn't earth shattering or something that most haven't also thought. Basically it was just about how breeders that just breed 'fashionable' pedigrees are hurting the industry and the extensions of that idea. It was just my opinion, not even necessarily fact, so I don't see how an advertiser should hold them responsible. But, I suppose if it appears on their site they retain some responsibility for content. I bring this up, not to single out the Blood-Horse because it is not just that publication that operates this way, it is just the only one I have had experience with. Also I noticed in the most recent issue of the BH (#3), -about the downturn- there are several times when this issue is hinted at. Of course they use euphemism's such as "breeding to race." But, if breeding to race can be distinguished from something else what else can that something else be aside from breeding to sell? Isn't that a consideration that has been around for a long, long time? Why was it taboo? All the industry publications have a duty to the industry as well as their duty of survival. If the industry doesn't survive neither will they. I often use the analogy of the remora. All of us that make a living or enjoy the sport are in some way remora's benefiting from the sport. But let's remember that it can't be all one way. We can't all just take from it. When that happens the host dies. We all, in all our different capacities, have to also give back to the sport.

It all begins in the breeding shed and the auctions. That is where the price starts adding up. Many have put forth ideas for monetary remedies such as a cap on stallion fees, limiting crop size, minimum standing age of stallions (one of mine read here), among others and combinations of those ideas. The reality may be that there are too many tracks, too many horses and not enough money to support them all. All businesses go through cycles of boom and bust. Some are not going to make it through this retraction. Most that will fail probably deserve to. The continued health of any business is dependant on a quality product, foresight and good planning based on realty, not speculation. When speculation holds sway the majority lose. For the health of the sport we need all involved in the industry to look at it as a inter-dependant enterprise not as a piece of real estate that can be fought over and dominated. That means horsemen, tracks, ADW's, breeder's, fans, and governments. Perhaps even the secondary and tertiary businesses such as trucking, farming etc... When the sport is healthy everybody benefits. After the chaff has blown away I think the industry will experience a healthier future from the results of the perceived downturn. Not everything is always as it appears.


Steve Zorn said...

An excellent argument, George, though I still disagree with your optimism. The problem is that handle is now falling rapidly as well, so purses must inevitably follow. Trainers' day rates can't follow downward; most trainers I know lose money (in NY at least) even at $90 a day. Net result, fewer owners willing to continue losing money, even if the cost of their stock declines.

Anonymous said...

Brilliantly laid out post George...very thorough and connects the dots perfectly.

We could maybe do with a few less horses entering the racing market anyway what with the debate regarding euthanasia trickling out of diminishing markets.

Anonymous said...

Hey buddy,

You need to man-up and post all responses to your not-entirely-well-conceived ideas.

I responded with the following on another of your so-called 'blogs' and you were too weak-minded to post my clear and obvious statement:

""Limiting yourself to "pinhookers" as "part of the problem" is short-sighted.

The fact is that each time ANYONE bids on a horse at auction, he/she becomes part of the problem.

In summary, the owners of Thoroughbred race horses have collectively created their own problems and have only themselves to blame.

In terms of worth to society, Thoroughbred runners have little reason to be valued at a level much greater than that of a ping-pong ball. We can all plainly see just how much people will wager on ping-pong balls.

Owning a Thoroughbred race horse is merely an act of speculation. At least most people who are buying homes now are doing so for the convenience of having someplace to rest at night. You cannot live in your race horse, and Thoroughbreds are not "needed" by society, so it is all speculation on the part of the owners and breeders. They, collectively, ARE their own problem.

C'mon, "breeders" ??? WTF do they think they are? Do they really believe that horses won't know how to breed without their up-close and personal (intrusive?) assistance?

Like owners, breeders are merely people with their hands out who are attempting to garner a piece of the pie!

Forget about the sub-prime mortgage comparisons and instead compare Thoroughbred ownership to the "dot-com bubble/bust". Thoroughbred owners and breeders add nothing to their products just like so many of those dot-com companies had no product other than a website.

Imagine a racing world without "Thoroughbred owners". Hell, imagine the slave trade without "owners". If you can't quite fathom that, then merely consider what Thoroughbred racing would be like if the animals involved came with the reduced values and reduced expenses as are typical in dog racing.

Clearly Thoroughbred owners and breeders have nobody but themselves to blame for their cost-related concerns.""

Sir, if you do not understand horse racing, then you can always find something else to do.

George said...

First of all I never cull any responses to my blog. If you left one on a previous posting it's there. If it's not you did something wrong in your attempt to post. Secondly, I have my name posted to what I write. If you want to "man up" sign up for your thoughts with your (real) name, not anonymous, or John Doe. I don't expect everyone, or anyone, necessarilly, to agree with me. However, I do expect a better read of my words, e.g. I did not "limit" myself to pinhookers as the problem, ergo "Part of." I never mind disagreement but I have to admit I'm nonplused at the obvious anger. Thanks for reading anyway.
However, I do believe I know who you are. If I remember correctly not only is your response and my reply posted but I sent an email directly to you with the figures. It had to do with how much the state gets out of the takeout, if I remember correctly. In the case of California,it is approx. 1/3 of a cent per dollar. George 1/28/09