Today's Commercial Environment:
A Troubling Influence
The health of today’s thoroughbred industry is often times overly equated with the health of the commercial market. When sales numbers are climbing, it’s assumed that the entire industry is doing well. Media outlets praise the efforts of sales companies, 
consignors and breeders. But does the health of the commercial market exist in a vacuum, or does it send
a rippling effect to other areas of the industry? And if so, what are the consequences, both positive and negative?
Little doubt exists that a healthy commercial market benefits stallion owners, boarding farms, and auxiliary industries such as veterinarians and feed suppliers. However, a broader examination of the industry reveals
that a rising commercial market can present significant problems for other industry members.
First and perhaps most importantly, a lucrative commercial market inverts the standard relationship between wholesale and retail value. In traditional economics, the retail market environment sets prices for
wholesalers. Wholesalers are rewarded only when the retail market is healthy enough to absorb higher costs of acquisition.
But in the thoroughbred industry, wholesalers (commercial breeders) are selling yearlings with an average rate of return of 26% after all expenses are accounted for. The retailers (owners) are collectively racing for less than half of the money they originally invest each year. Not that a stagnant commercial market would bridge that gap completely, but it would certainly allow owners greater opportunities to realize occasional profits at the racetrack.
Wholesale and retail prices aren’t the only components being inverted under a lucrative commercial market. Stud fees for proven vs. unproven commodities also seem to conflict with more conventional economic models. Older, more established sires get squeezed at the marketplace in favor of unproven sires who have no sire credentials, but effectively stir the emotions of buyers and advisors who adhere to the ‘what may be’ psychology, as opposed to ‘what is’. Back in the 1990’s, breeders lined up in droves to breed to European Horse of the Year and impeccably-bred sprinter Dayjur. Not only did they pay a stud fee well in excess of what others were paying for older, proven sires like Silver Ghost, but yearling buyers and their advisors were paying in the low to mid six figures for his yearlings. Dayjur’s failure best illustrates the potential pitfall of the ‘what may be’ psychology.
Strong commercial markets in other industries are usually based on sound market research that can usually predict success and failure. But in an industry where 85% of all stallion prospects entering stud will eventually be deemed as failures, it’s hard to argue that strong commercial indicators based in part on a stallion population that will for the most part fail, are economically sound.
Others argue that the biggest problem imposed by the success of the commercial market is the manner in which it bleeds the racing industry of its superstars. The list is long and distinguished in recent years of potential fan-building superstars that have been whisked off the track in favor of the lucrative commercial market. Bernardini, Mineshaft, Ghostzapper, Empire Maker… not to mention all of the Grade 1-caliber fillies that were just beginning to build fan bases before the commercial dollars began calling out their name. Outside of the rare owner who possesses that unique sportsman personality, most owners succumb to lucrative offers from breeding syndicates and rob the industry of developing superstars.
Given the current economic models, it’s hard to blame owners who sit to make millions from syndication for pulling their horses from the public eye. With the best of racing luck, a top Grade 1 colt may earn two or three million dollars, but a single syndication can net the owner ten times that amount. And of course, it’s the commercial market’s fixation with 1st year sires that ultimately drives the price syndicates are willing to pay for young stallion prospects.
With pinhookers eye-balling seven figure returns based on a nine or ten second workout, breeders are increasingly looking to infuse precociousness into their breeding program with little or no regard for long term usefulness or stamina. The economic incentives for raising durable types who may require eight furlongs are quickly vanishing in favor of the muscular, compact, speed-oriented types.
The early-maturing economic model presents several problems for the rest of the industry. First of all, it creates two developmental curves whereby we get one set of recognizable stars that excel as two year olds, followed by another group that does well as three and four year olds. In a scenario where we had more homogenous foal crops, the sports biggest stars would have more of an opportunity to develop loyal fan bases. Also, early maturing types are usually found competing at the shorter distances that require explosive speed and increase the likelihood of injury, further complicating the sad fact that nearly 30% of all foals never make it to the races.
The soundness issue is also complicated by the lack of vestment commercial breeders have in the long term success of the foals they raise. The bulk of their financial return comes from presenting an attractive, early maturing weanling or yearling in the fall, or an explosive two year old who dazzles the modern trainer with a one furlong burst, and is only remotely tied in with the long term success of what they raise. Outside of residual breeders awards and the occasional buyer who has developed a loyalty to that breeder, the bulk of a commercial breeder’s income comes from following industry trends of unproven sires and flashy individuals.
For those entering the racing game, the most noticeable effect of the lucrative commercial market is the size of the check they’re forced to write in order to enter the business. In a bearish commercial market, the economic hurdle for entering the game is markedly lower, creating more optimism for potential owners and larger field sizes that are directly linked with increased wagering. Though it hasn’t been studied formally, there’s likely a relationship between the amount paid initially for a horse, and the prices being asked for services such as training, veterinary, feed, etc.
Different types of individuals will undoubtedly find varying levels of success under certain market conditions, and no where is this more true than in the thoroughbred industry. As the price for the average yearling rises, it takes an increasingly sales savvy consultant and/or trainer to encourage investment from the owner. D. Wayne Lukas mastered this skill in the early 1980’s and passed it along to several of his protégés who dominate the upper levels of buying in the United States. Trainers better known for their horsemanship than their salesmanship begin to suffer, and those trainers with the power of persuasion start ascending to the upper levels of the game.
This dynamic then starts feeding into the problems surrounding durability. As these persuasive trainers begin to build large stables, they quickly evolve into program-driven machines where a particular horse must sink or swim. These trainers have what seems to be an inexhaustible supply of horse flesh to search through for the next allowance or stakes-caliber runner. Catering to the needs of horses who appear to be marginally talented becomes a waste of time and more importantly, stall space.
As we’ve all witnessed in recent months, the tremendous amount of money flowing through the commercial markets has likely contributed to an increase in fraudulent transactions. That’s not to say that similar incidents wouldn’t occur within the framework of a depressed commercial market, but the opportunities for large windfalls are everywhere in a market where investors are willing to write six and seven figure checks for bloodstock. In an economy where the money is being driven more by track performance and less by commercial hype and salesmanship, payoffs for agents and trainers tend to be more merit based.
Commercial success also has a tendency to influence the science, or at least the interpretation of science within the industry. If a particular fad seems to be contributing to higher prices, it is usually perpetuated further, regardless of its scientific or statistical validity. The best example is the current cataloguing standards and it’s focus on the female family. John Gaines, founder of Gainesway Farm and the Breeder’s Cup, said it best: “The mythology surrounding the breeding of thoroughbreds is pervasive. A few of these myths are the astonishing stupidity of the dosage system, the absurd overemphasis on the female family, and the irrational belief in the validity of nicks”.
Current research has clearly demonstrated that the best predictor of success in broodmare prospects is racing class, yet the commercial market continues to promote the importance of the female family through its cataloging standards. Specific details of a mare’s racing aptitudes are reduced to generic statements such as “At 2, twice 3rd; at 3, unraced; at 4, one win, once 2nd. Earned $34,800”. Details such as distance raced, fractional times, and class of competition are omitted altogether to avoid the possibility of effecting market price. Never mind what the research is telling us. And of course, the disproportionately high prices being paid for the progeny of unproven sires is likely contributing to a perception among newcomers that new sires have a better chance of success than scientific research suggests.
It shouldn’t be suggested that the world has no use for the commercial breeder. There is a degree of risk that they assume each year that others are able to avoid. Fetal loss, limb deformities, and infertility are just a handful of the risks absorbed by commercial breeders. But before we heap too much praise on them, or on the success of the commercial industry as a whole, it’s important to understand that most facets of our industry are interlinked and impacted by one another. A healthy commercial market may prove lucrative for some, but from a broader view, its success comes at the detriment of those who support our industry’s most important ingredient: racing.
