Estimated Profitability of Thoroughbred Yearlings Sold in Auctions in the United States, 2001-2018 - MDPI
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sustainability
Article
Estimated Profitability of Thoroughbred Yearlings
Sold in Auctions in the United States, 2001–2018
Jenna Bryant and C. Jill Stowe *
Department of Agricultural Economics, University of Kentucky, Lexington, KY 40506, USA;
jenna.bryant@uky.edu
* Correspondence: jill.stowe@uky.edu
Received: 12 December 2019; Accepted: 6 January 2020; Published: 8 January 2020
Abstract: Yearling auctions constitute the most common means of trading prospective Thoroughbred
racehorses. The main objective of many equine operations is to breed yearlings to sell at these auctions,
and therefore, the ability of breeders to consistently realize positive returns is paramount to their
long-term participation in the market. In this article, we investigate the estimated profitability of
Thoroughbred yearlings sold in auctions from 2001–2018. According to our estimates, less than 50%
of transactions were profitable, with negative median profit in all years under analysis but two. In
addition, the likelihood of realizing a positive return diminishes as the quality of sire decreases. Our
results suggest that the long-run sustainability for many breeders, especially breeders that may lack
the capital to invest in high quality stallions, is questionable.
Keywords: auction; thoroughbred yearling; profitability; investment
1. Introduction
The “triple bottom line” is a framework suggesting that the long-run sustainability of firms, or
even an industry, depends simultaneously on economic (profit), social (people), and environmental
(planet) concerns. Without any one of the three, longevity of a firm or industry is uncertain. However,
without economic sustainability, the other two concerns may never be germane. A recent economic
impact study commissioned by the British Thoroughbred Breeders’ Association included several
key statistics that indicated the precarious economic standing of the British Thoroughbred breeding
industry, revealing several startling revelations about the industry’s profitability and overall future
outlook. The study reported that from 2014 to 2018, 66% of breeders lost money, and the average horse
sold at Tattersalls in Book 3 lost £23,500 [1]. The consequence of these and other findings is that the
sustainability of the industry is threatened if this type of performance continues. The objective of this
paper is to examine the profitability of breeding in the U.S. market for Thoroughbred yearlings to
identify whether this same type of threat exists.
1.1. Background
There are a number of business sectors in the Thoroughbred industry, which are not necessarily
mutually exclusive, but which have evolved as a way to diversify risk. For example, in the racing
sector, market participants may own or train racehorses. In the breeding sector, operations exist that
breed horses with the intention to later race them under their own name, with the intention of later
selling them, or to “pinhook” horses (purchasing a prospective racehorse to re-sell at a later time, such
as purchasing a weanling to sell as a yearling). Operations that breed to sell are frequently referred to
as commercial breeders. The primary market for these breeders is the auction market for yearlings, or
one-year-old horses.
Sustainability 2020, 12, 463; doi:10.3390/su12020463 www.mdpi.com/journal/sustainabilitySustainability 2020, 12, 463 2 of 13
From 2001–2018, over 25% of the North American Thoroughbred foal crop was sold at a public
auction as a yearling [2–5]. The yearling market always has a handful of seven-figure standouts that
capture headlines, but the bulk of the market is composed of horses who sell for far less. Motivated
by the British Thoroughbred Breeders’ Association study, the objective of this study is to investigate
expected profit and the likelihood of profitability for yearlings being sold at auction in the United States.
Numerous yearling auctions are held every year across the United States. However, we consider
the primary commercial auctions in this study: the Keeneland September Yearling Sale (Lexington, KY,
USA), the Fasig-Tipton Saratoga Selected Yearlings Sale (Saratoga, NY, USA), and the Fasig-Tipton
Kentucky Yearlings Sale (Lexington, KY, USA). Although it was canceled after 2002, we also include
the Keeneland July Yearling Sale (Lexington, KY, USA) in 2001 and 2002. Over the period covered by
the study, more than 50% of the yearlings sold at public auction in the United States/North America
were sold at one of these sales [3–7].
Kentucky is considered to be the Thoroughbred breeding capital of the world, producing more
than 40% of the annual North American Thoroughbred foal crop annually. In 2011, the Kentucky
state government’s Legislative Research Commission conducted a study investigating the state’s
breeding industry [8]. Though dated now, the study provided valuable insight about the income
of the breeding industry and how it is distributed. The report indicates that there is an inverse
relationship between percent of total income and percent of total farms, with approximately 20.2%
of farms representing 83.8% of total income. These farms earned more than $1,000,000, while 43.2%
of farms earned less than $250,000 but represented only 2.5% of the total income. On average, about
one-quarter of income is from equine sales, second only to stud fees at 30.4%. Boarding fees constitute
22.7% of income, commissions/sales preparation/training at 5.7%, and “other” is listed at 17.1% of
gross income. However, most farms rely on income from equine sales since only one of every six
farms stands stallions. This study indicated that the average revenue per horse was $21,613, while the
average expenditure per horse was $21,531, culminating in a profit of only $82 per horse.
The Thoroughbred industry has been in a constant state of change, including the time period
under analysis. From 2001 to 2018, the annual North American foal crop has declined by over 42.6%,
from 34,721 in 2001 to an estimated 19,925 in 2018. The number of races has declined by about 34.6%,
from 62,835 in 2001 to 41,083 in 2018. Meanwhile, average purse per race, adjusted for inflation,
increased just over 11% from 2001 to 2018. The number of active breeding stallions decreased by over
65%, from 3845 in 2001 to 1310 in 2018 [2]. All of these factors and more contribute to the expected
profitability of commercial Thoroughbred breeding.
1.2. Related Literature
While a number of papers have focused on identifying determinants of sales prices, to our
knowledge, none have examined the profitability associated with selling prospective Thoroughbred
race horses. In fact, few papers have investigated the profitability of any of the various segments
of the Thoroughbred industry. Neibergs and Vinzant study the profitability of owning racehorses.
On average, over 80% of racehorses were unable to recover the variable costs of training, although
the authors demonstrate that there are positive economic returns associated with the ownership of
claiming racehorses [9]. Claiming races are ones in which all of the horses entered in a race are offered
for sale at the claiming price; claiming races are considered to be among the lowest quality of races in
this industry. In addition, they also suggest that at this level, the barriers to entry, such as the initial
purchase price, are not as high as most prospective new owners might anticipate. However, it should
be noted that the Neibergs and Vinzant study is about 20 years old and replicating their study today
may yield different results.
Bosh et al. examine the profitability of investing in Thoroughbred broodmares [10]. The authors
determine that over a seven-year investment period, a mare must produce a live foal six out of seven
years to yield a positive financial return from her initial purchase. Moreover, they specify that maresSustainability 2020, 12, 463 3 of 13
valued under $100,000 were not profitable over a seven-year investment period, showing widespread
unprofitability throughout the thoroughbred sales industry.
Finally, Gamrat and Sauer compare three models capable of explaining investment decisions in
Thoroughbred yearling fillies. Their results suggest that investing in Thoroughbred fillies does not
appear to be driven by traditional financial profitability concerns [11]. Rather, they find that a “utility
of participation” model in which owners receive utility from simply participating in the game of racing
best rationalizes purchase prices of yearling fillies. The authors describe this nonpecuniary utility of
participating in the sport of racing as a racehorse owner like the utility a parent might receive watching
their children play sports.
In this paper, we first examine trends in prices and profitability from major Thoroughbred yearling
sales from 2001–2018. According to our estimates, less than 50% of transactions were profitable, with
negative median profit in all years under analysis but two. In addition, the likelihood of realizing
a positive return is diminishing in sire quality when sire quality is measured by stud fee. Then,
we investigate implied “discounts” on one of the major costs of producing a yearling, the stud fee,
that must exist to guarantee a threshold level of profitability. For some categories of sire quality, no
transactions would have been profitable even with a complimentary stud fee. Our results suggest that
the long-run sustainability for some breeders is in question, especially those lacking capital to invest in
high quality stallions.
2. Data and Empirical Methods
2.1. Data
Data to estimate profitability of individual yearling transactions were collected from a number of
sources. Sales results from yearling Thoroughbred sales were collected from the July (2001 and 2002)
and September yearling sales (2001–2018) at Keeneland [6] and from the Fasig-Tipton Saratoga Selected
Yearlings and Kentucky Yearlings sales (2003 to 2018) [7]. For each transaction, the sale price, sex, sire
(father of yearling), dam (mother of yearling), consigner/owner, and purchaser were identified. Only
horses that were sold at the auction are included, as yearlings that were taken out of the sale or did not
meet their reserve price are excluded. Advertised breeding year stud fees, which generally constitute
the major share of production cost are collected from the annual stud fee issues of the Blood-Horse
MarketWatch. Stud fees are not always available for all stallions; observations with missing stud fee
values were excluded. With these exclusions, the sample size consists of 74,789 transactions. Table 1
identifies the number of transactions captured from each auction house from 2001–2018 for which we
have complete information.
In addition to stud fees, other major costs involved with breeding and selling yearlings are
commission costs and production costs. Commission to the auction house is contingent upon the sale
price and the auction house. Prior to 2017, sales commission at Keeneland was a flat $1000 fee for sales
under $20,000 and 5% of sales price for prices above $20,000. The 2017 policy change is reflected, using
a flat $500 for sales under $10,000 and 5% of sales price for prices above $10,000. At Fasig-Tipton, sales
commission is a standard 5% of all sales.
Actual production costs are not readily available and must be estimated. Production costs account
for boarding (or maintenance, if breeders own their own farm) and caring for the mare for one year
and her foal until the sale as a yearling. These costs can be assumed to include farm labor, feed,
veterinary and farrier costs, nominations fees, sale entry fees, radiographs to assess the bones and
joints of the young horse, endoscopic evaluation of the airway to check for abnormalities, and sales
prep. These costs can vary significantly depending on the facility where the mare and foal are boarded,
the types of veterinary expenses incurred, and so on. In consultation with a number of area farm
managers, we estimate the production cost of producing a foal until the time it is sold as a yearling as
$20,000, representing low costs, and $35,000 to represent high production costs. We recognize thatSustainability 2020, 12, 463 4 of 13
some breeders may be able to produce foals at a lower cost than $20,000, but also that some may exceed
the $35,000 production cost.
Table 1. Sample size.
Sale Year Keeneland Fasig-Tipton Total
2001 2666 – 2666
2002 2788 – 2788
2003 2899 922 3821
2004 3302 743 4045
2005 3443 1263 4706
2006 3494 1193 4687
2007 3776 1309 5085
2008 3591 1418 5009
2009 3102 1293 4395
2010 3040 1358 4398
2011 2901 1185 4086
2012 2499 1390 3889
2013 2729 1208 3937
2014 2798 1309 4107
2015 2724 1542 4266
2016 2775 1435 4210
2017 2538 1604 4142
2018 2900 1652 4552
Total 53,965 20,824 74,789
2.2. Empirical Methods
Two values of estimated profit were computed for each transaction. Profit is measured as sales
price less the sire’s advertised breeding year stud fee, sales commission, and low or high production
costs. Since the estimated low and high production costs of $20,000 and $35,000 are considered to be in
2018 dollars, these figures were deflated using the Consumer Price Index (CPI) to represent equivalent
costs in previous years [12]. Finally, both sales prices and profit were adjusted for inflation. Trends in
sales prices and profit were analyzed at the 99th, 95th, 75th, 50th, 25th, and 5th percentiles, as well as at
the mean. In addition, assuming low production costs, the percent of profitable sales were computed
on an annual basis.
While there is no defined acceptable level of profitable transactions, the British report suggests that
only 33% of profitable transactions is not sustainable. Therefore, we consider two possible thresholds
which should be more appropriate for sustainability concerns: 50% and 67% profitable transactions.
Then, we identify an implied “stud fee discount” using Goal Seek in Excel. The objective of this exercise
is to identify the minimum stud fee discount required to ensure a 50% or 67% threshold of profitable
transactions when that threshold is not met. Once Goal Seek identified a solution, we searched locally
in order to ensure that the minimum was obtained.
3. Results
3.1. Trends in Sales Prices and Profitability, 2001–2018
Figure 1 depicts inflation-adjusted average and median sales prices from 2001–2018. Inspection of
Figure 1 highlights the impact of the Great Recession in 2008 and 2009 on prices in the Thoroughbred
yearling market. Mean prices fell by about 40% while median price fell by nearly 50%.Sustainability 2020,
Sustainability 2020, 12,
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Inflation-adjusted Mean and Median Sales Prices, 2001–2018
$160,000.00
$140,000.00
$120,000.00
$100,000.00
$80,000.00
$60,000.00
$40,000.00
$20,000.00
$-
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Mean Median
Figure 1. Trends in inflation-adjusted average and median sales prices, 2001–2018.
Figure 1. Trends in inflation-adjusted average and median sales prices, 2001–2018.
Table 2 presents average nominal profit, average inflation-adjusted profit in 2018 dollars, and
the percentage of profitable
Table 2 presents averagesales annually
nominal profit,from 2001 inflation-adjusted
average to 2018. Overall, profit
underinthe assumption
2018 of
dollars, and
low productionofcosts,
the percentage 44.4%sales
profitable of yearling
annuallysales
fromwere
2001profitable, while under
to 2018. Overall, underthe
theassumption
assumptionofofhigh
low
production costs, 36.1% of all yearling sales were profitable. In 2009 and 2010,
production costs, 44.4% of yearling sales were profitable, while under the assumption average profit was
of high
negative under
production the36.1%
costs, assumption of high production
of all yearling sales were costs.
profitable. In 2009 and 2010, average profit was
negative under the assumption of high production costs.
Table 2. Average profit, average inflation-adjusted profit (2018 dollars), and the percent of profitable
sales, 2001 to 2018.
Table 2. Average profit, average inflation-adjusted profit (2018 dollars), and the percent of profitable
sales, 2001 to 2018. High Production Costs Low Production Costs
Inflation-Adjusted
High Production Costs Inflation-Adjusted
Low Production Costs
Nominal Nominal
Sale Year Inflation-Adjusted
Profit % Profitable Inflation-Adjusted
Profit % Profitable
Nominal
Profit % Nominal
Profit
Sale Year (2018Profit
Dollars) (2018Profit
Dollars) % Profitable
Profit Profitable Profit
(2018 dollars) (2018 dollars)
2001
2001 $45,621.80
$45,621.80 $64,684.55
$64,684.55 36.4%
36.4% $56,201.25
$56,201.25 $79,684.55
$79,684.55 44.1%
44.1%
2002
2002 $21,189.90
$21,189.90 $29,576.34
$29,576.34 34.8%
34.8% $31,936.61
$31,936.61 $44,576.34
$44,576.34 44.9%
44.9%
2003
2003 $17,786.06
$17,786.06 $24,272.17
$24,272.17 35.0%
35.0% $28,777.69
$28,777.69 $39,272.16
$39,272.16 44.1%
44.1%
2004
2004 $25,650.47
$25,650.47 $34,096.52
$34,096.52 39.5%
39.5% $36,934.82
$36,934.82 $49,096.52
$49,096.52 47.4%
47.4%
2005
2005 $29,300.73
$29,300.73 $37,672.37
$37,672.37 39.1%
39.1% $40,967.40
$40,967.40 $52,672.37
$52,672.37 47.1%
47.1%
2006
2006 $28,301.17
$28,301.17 $35,250.12
$35,250.12 38.0%
38.0% $40,344.19
$40,344.19 $50,250.13
$50,250.13 46.5%
46.5%
2007
2007 $26,324.90
$26,324.90 $31,887.04
$31,887.04 39.6%
39.6% $38,708.41
$38,708.41 $46,887.03
$46,887.03 48.1%
48.1%
2008 $9623.41 $11,223.59 33.9% $22,484.82 $26,223.59 41.9%
2008 $9623.41 $11,223.59 33.9% $22,484.82 $26,223.59 41.9%
2009 $(8965.57) $(10,495.35) 24.0% $3848.06 $4504.65 29.5%
2009 $(8965.57) $(10,495.35) 24.0% $3848.06 $4504.65 29.5%
2010 $(11,904.63) $(13,705.88) 23.1% $1124.04 $1294.11 29.5%
2010
2011
$(11,904.63)
$3323.97
$(13,705.88)
$3711.20
23.1%
29.3%
$1124.04
$16,758.85
$1294.11
$18,711.19
29.5%
36.6%
2011
2012 $3323.97
$12,627.91 $3711.20
$13,810.40 29.3%
35.0% $16,758.85
$26,343.56 $18,711.19
$28,810.40 36.6%
44.9%
2012
2013 $12,627.91
$27,598.60 $13,810.40
$29,742.53 35.0%
42.2% $26,343.56
$41,517.35 $28,810.40
$44,742.52 44.9%
52.6%
2013
2014 $27,598.60
$25,144.80 $29,742.53
$26,674.52 42.2%
40.4% $41,517.35
$39,284.58 $44,742.52
$41,674.52 52.6%
51.3%
2014
2015 $25,144.80
$26,897.26 $26,674.52
$28,497.48 40.4%
40.4% $39,284.58
$41,054.96 $41,674.52
$43,497.47 51.3%
48.8%
2016
2015 $23,330.58
$26,897.26 $24,409.62
$28,497.48 37.1%
40.4% $37,667.50
$41,054.96 $39,409.62
$43,497.47 45.2%
48.8%
2017
2016 $35,596.53
$23,330.58 $36,467.93
$24,409.62 41.2%
37.1% $50,238.11
$37,667.50 $51,467.93
$39,409.62 49.2%
45.2%
2018
2017 $36,732.77
$35,596.53 $36,732.77
$36,467.93 39.9%
41.2% $51,732.77
$50,238.11 $51,732.77
$51,467.93 48.8%
49.2%
Total $20,263.61 36.1% $33,219.45 44.4%
2018 $36,732.77 $36,732.77 39.9% $51,732.77 $51,732.77 48.8%
Total $20,263.61 36.1% $33,219.45 44.4%
Figure 2 illustrates the percentage of profitable sales under the assumption of both low and high
production costs for the same time period. The two years following the start of the Great Recession
Figure 2 illustrates the percentage of profitable sales under the assumption of both low and high
demonstrate the lowest proportion of profitable transactions (2009 and 2010), while 2013, which was
production costs for the same time period. The two years following the start of the Great Recession
a few years into the recovery, exhibited the largest percentage of profitable transactions. 2013 and
demonstrate the lowest proportion of profitable transactions (2009 and 2010), while 2013, which was
2014 were the only years in which more than half of the transactions were profitable when assuming
a few years into the recovery, exhibited the largest percentage of profitable transactions. 2013 and
low production costs. With the exception of years spanning the Great Recession and its recovery, the
2014 were the only years in which more than half of the transactions were profitable when assuming
percent of profitable transactions appear to remain relatively constant.Sustainability 2020, 12, 463 6 of 13
Sustainability 2020, 12, x FOR PEER REVIEW 6 of 14
low production costs. With the exception of years spanning the Great Recession and its recovery, the
Sustainability 2020, 12, x FOR PEER REVIEW 6 of 14
percent of profitablePercent transactions appear to
of Profitable remain
Sales relatively
Under Low and constant.
High Production Costs
60.0%
Percent of Profitable Sales Under Low and High Production Costs
50.0%
60.0%
40.0%
50.0%
40.0%
30.0%
30.0%
20.0%
20.0%
10.0%
10.0%
0.0%
0.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
2001 2002 2003 2004 2005 2006 (High
% Profitable 2007 2008 2009 2010 2011
Cost) % 2012 2013 2014
Profitable (Low2015 2016 2017 2018
Cost)
% Profitable (High Cost) % Profitable (Low Cost)
Figure 2. Percent of profitable yearling transactions by year under low and high production cost
Figure 2. Percent of profitable yearling transactions by year under low and high production
assumptions.
Figure 2. Percent of profitable yearling transactions by year under low and high production cost
cost assumptions.
assumptions.
For the remainder of the paper, to err on the side of not underestimating profit, all further
For the remainder of the paper, to err on the side of not underestimating profit, all further analyses
analyses are remainder
For the conducted of under the assumption
the paper, to err on of low
the production
side costs ($20,000).profit, all further
of not underestimating
are conducted under the assumption of low production costs ($20,000).
Figures 3 and 4 illustrate estimated inflation-adjusted profit
analyses are conducted under the assumption of low production costs ($20,000). at the 99th, 95th, and 75th
Figures 3 and 4 illustrate estimated inflation-adjusted profit at the 99th, 95th, and 75th percentiles
percentiles
Figures(Figure
3 and 3)4 as well as estimated
illustrate the 50th, 25th, and 5th percentiles
inflation-adjusted profit at(Figure 4). While
the 99th, 95th, there may be
and 75th
(Figure 3) as well as the 50th, 25th, and 5th percentiles (Figure 4). While there may be positive economic
positive economic
percentiles (Figure 3)returns
as wellonas average
the 50th,in a given
25th, and 5thyear, this exercise
percentiles (Figuredemonstrates
4). While therethat
maywith
be the
returns on average in a given year, this exercise demonstrates that with the exception of 2013 and 2014,
positive economic
exception returns
of 2013 and 2014,on average
median in afor
profit given year,was
breeders thisestimated
exercise demonstrates
to be negative.that with words,
In other the
median profit for breeders was estimated to be negative. In other words, a few especially lucrative
aexception of 2013lucrative
few especially and 2014,transactions
median profitmayforyield
breeders was estimated
an overall to be negative.
positive return enough In other fewer
though words,than
transactions
a fewof may
especially yield
lucrative an overall positive return enough though fewer than 50% of transactions are
50% transactions are transactions may yield an
profitable. Moreover, overall
Figure 4 positive return
illustrates enough
sizable though
losses fewerby
incurred than
many
profitable. Moreover,
50% of transactions Figure 4 illustrates
are profitable. sizable
Moreover, Figure 4 illustrates sizable losses incurred by many of
losses incurred by many breeders in the aftermath
breeders in the aftermath of the Great Recession.
the Great Recession.
breeders in the aftermath of the Great Recession.
Inflation-adjusted Profit, 2001–2018
Inflation-adjusted Profit, 2001–2018
$1,200,000.00
$1,200,000.00
$1,000,000.00
$1,000,000.00
$800,000.00
$800,000.00
$600,000.00
$600,000.00
$400,000.00
$400,000.00
$200,000.00
$200,000.00
$-
$-
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
p99
p99 p95
p95 p75p75
Figure3.3.
Figure
Figure 99th,95th,
3.99th,
99th, 95th,and
95th, and
and 75th
75th
75th percentiles
percentiles for
forfor
percentiles inflation-adjusted
inflation-adjusted profit,
profit,
inflation-adjusted 2001–2018.
2001–2018.
profit, 2001–2018.Sustainability 2020, 12,
Sustainability 2020, 12, 463
x FOR PEER REVIEW 77 of
of 13
14
Inflation-adjuted Profit, 2001–2018
$10,000.00
$-
$(10,000.00)
$(20,000.00)
$(30,000.00)
$(40,000.00)
$(50,000.00)
$(60,000.00)
$(70,000.00)
$(80,000.00)
$(90,000.00)
p50 p25 p5
Figure 4. 50th, 25th, and 5th percentiles for inflation-adjusted profit, 2001–2018.
Figure 4. 50th, 25th, and 5th percentiles for inflation-adjusted profit, 2001–2018.
What follows examines inflation-adjusted median profit and percentage of profitable transactions
What
by stud follows The
fee category. examines
industry inflation-adjusted
typically considers median profit sires”
“commercial and topercentage
be those with of advertised
profitable
transactions
stud fees of by stud $25,000
at least fee category. (someThe industry
industry typically
sources considers
consider “commercial
stallions with stud sires”
fees toof be those
$15,000
with advertised stud fees of at least $25,000 (some industry sources consider
and above to be commercial, but our analysis shows that fewer than half of transactions in this stallions with stud fees
of $15,000 and above to be commercial, but our analysis shows that fewer than
category were profitable). Figures 5 and 6 present inflation-adjusted median profit for commercial half of transactions in
this non-commercial
and category were sires,profitable). Figures
respectively. The5 differences
and 6 presentin the inflation-adjusted median profit
two figures is unmistakable. Figurefor 5
commercial and non-commercial sires, respectively. The differences
suggests that median profit is nearly always positive for yearlings by commercial sires and that thein the two figures is
unmistakable.
largest Figureis 5earned
median profit suggests that median
by yearlings profit
with the is nearly
highest quality always positive though,
sires (notably, for yearlings
when the by
commercial
economy sires and downturns
experiences that the largest suchmedian profitRecession,
as the Great is earned by yearlings
those breeders with thestand
also highest quality
to lose the
sires (notably, though, when the economy experiences downturns such as the Great
most). In contrast, Figure 6 illustrates nearly guaranteed negative median profit across all categories Recession, thoseof
breeders also stand to lose the most). In contrast, Figure 6 illustrates nearly
non-commercial sires. Together, Figures 5 and 6 tell the story of a polarized market in which the best guaranteed negative
medianindividuals
quality profit across areallincategories
high demand, of non-commercial
but demand forsires. Together,
individuals Figures
falling 5 and
short 6 tell
of that the is
ideal story
weak. of
a polarized market in which the best quality individuals are in high demand,
Next, Table 3 presents the percentage of profitable transactions by stud fee. From 2001 to 2018, but demand for
over 45% offalling
individuals short of sold
the yearlings that ideal
were isbyweak.
“commercial” sires. The percentage of profitable sales is
monotonically decreasing from the highest of
Next, Table 3 presents the percentage profitable
stud transactions
fee category (57.6%) to bythe
stud fee. From
lowest 2001Breeders
(19.7%). to 2018,
with the initial means to invest in a higher quality stallion based on advertised stud fee stand a sales
over 45% of the yearlings sold were by “commercial” sires. The percentage of profitable greater is
monotonically
chance decreasing
of realizing positivefrom the highest
economic stud fee category (57.6%) to the lowest (19.7%). Breeders
returns.
with the initial means to invest in a higher quality stallion based on advertised stud fee stand a greater
chance of realizing positive economic returns.Sustainability 2020, 12, x FOR PEER REVIEW 8 of 14
Sustainability 2020, 12, x FOR PEER REVIEW 8 of 14
Sustainability 2020, 12, 463 Inflation-adjusted median profit for commercial sires 8 of 13
$300,000
Inflation-adjusted median profit for commercial sires
$250,000
$300,000
$200,000
$250,000
$150,000
$200,000
$100,000
$150,000
$50,000
$100,000
$-
$50,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
$(50,000)
$-
$(100,000) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
$(50,000)
$100,000+ $50,000–$99,999 $25,000–$49,999
$(100,000)
$100,000+
Figure 5. Inflation-adjusted$50,000–$99,999 $25,000–$49,999
median profit for offspring of commercial sires.
Figure 5. Inflation-adjusted median profit for offspring of commercial sires.
Figure 5. Inflation-adjusted median profit for offspring of commercial sires.
Inflation-adjusted median profit for non-commercial sires
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
$10,000 Inflation-adjusted median profit for non-commercial sires
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
$5,000
$10,000
$-
$5,000
$(5,000)
$-
$(10,000)
$(5,000)
$(15,000)
$(10,000)
$(20,000)
$(15,000)
$(25,000)
$(20,000)
$(30,000)
$(25,000)
$15,000–$24,999 $10,000–$14,999 $5000–$9999 < $5000
$(30,000)
Figure 6. Inflation-adjusted median profit for offspring of non-commercial sires.
Figure $15,000–$24,999
6. Inflation-adjusted $10,000–$14,999 $5000–$9999
median profit for offspring < $5000 sires.
of non-commercial
Figure 6. Inflation-adjusted median profit for offspring of non-commercial sires.Sustainability 2020, 12, x FOR PEER REVIEW 9 of 14
Sustainability 2020, 12, 463 9 of 13
Table 3. Percentage of profitable sales by stud fee category.
Table
Stud Percentage of profitable
Fee 3.Category sales by stud
% Profitable n fee category.
% of Total
$100,000+
Stud Fee Category 57.6%
% Profitable n 5125 % of Total6.9%
$50,000–$99,999 57.0% 8021 10.7%
$100,000+ 57.6% 5125 6.9%
$25,000–$49,999
$50,000–$99,999
51.7%
57.0%
20,906 10.7%
8021
28.0%
$15,000–$24,999
$25,000–$49,999 41.7%
51.7% 16,623
20,906 28.0%22.2%
$10,000–$14,999
$15,000–$24,999 38.2%
41.7% 12,658 22.2%
16,623 16.9%
$10,000–$14,999
$5000–$9999 38.2%
28.1% 12,658
10,314 16.9%13.8%
Less$5000–$9999
than $5000 28.1%
19.7% 10,314
1142 13.8%1.5%
Less than $5000 19.7% 1142 1.5%
Total
Total 44.4%
44.4% 74,789 100%100%
74,789
Figures 7 and 8 illustrate percentage of profitable transactions among yearlings by commercial
siresFigures 7 and 8 illustrate
and non-commercial percentage
sires, of profitable
respectively, from 2001 transactions
to 2018. Foramong yearlings
most years, by commercial
investing in the top
sires
tier of stallions (stud fees of $100,000 and up) resulted in the greatest percentage of profitableinsales,
and non-commercial sires, respectively, from 2001 to 2018. For most years, investing the
top tier of stallions (stud fees of $100,000 and up) resulted in the greatest percentage
although there are a few exceptions. The largest deviations occurred in the years following the Great of profitable
sales, although
Recession, therebreeders
where are a fewpaid
exceptions.
peak studThe largest
fees butdeviations
experiencedoccurred in the years
significant declinesfollowing the
in prices.
Great Recession, where breeders paid peak stud fees but experienced significant declines
Yearlings by sires in the lowest stud fees of the commercial sires ($25,000–$49,999) appear to have the in prices.
Yearlings by sires in
most predictable the lowest
pattern stud feessales,
of profitable of theexhibiting
commercial lesssires ($25,000–$49,999)
extreme deviations inappear
times to ofhave
boomtheor
most predictable pattern of profitable sales, exhibiting less extreme deviations in
bust. Figure 6 depicts the same measure for yearlings by non-commercial sires. While the percentage times of boom or
bust. Figure 6 sales
of profitable depicts
is the same measure
generally for yearlings
decreasing from higherby non-commercial
stud fees to lower sires. While
ones, theretheispercentage
significant
of profitable sales is generally decreasing from higher stud fees to lower ones, there
variability in these measures from year to year. In addition, there were no profitable transactions is significant in
variability in these measures from year to year. In addition, there were no
2010 in the lowest stud fee category, even under the assumption of low production costs. profitable transactions in
2010 in the lowest stud fee category, even under the assumption of low production costs.
Percent of Profitable Transactions for Commercial Sires
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
$100,000+ $50,000–$99,999 $25,000–$49,999
Figure 7. Percent of Profitable Transactions for Commercial Sires, 2001 to 2018.
Figure 7. Percent of Profitable Transactions for Commercial Sires, 2001 to 2018.Sustainability 2020, 12, 463 10 of 13
Sustainability 2020, 12, x FOR PEER REVIEW 10 of 14
Percent of Profitable Transactions for Non-Commercial Sires
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
$15,000–$24,999 $10,000–$14,999 $5000–$9999 < $5000
Figure 8. Percent of Profitable Transactions for Non-commercial Sires, 2001 to 2018.
Figure 8. Percent of Profitable Transactions for Non-commercial Sires, 2001 to 2018.
Based on this analysis, a few key points are evident. Perhaps the most remarkable is that even
Based on this analysis, a few key points are evident. Perhaps the most remarkable is that even
under the assumption of low production costs, fewer than half of the transactions are profitable in all
under the assumption of low production costs, fewer than half of the transactions are profitable in all
but two of the years under analysis. Moreover, estimated median profit is negative for all years but
but two of the years under analysis. Moreover, estimated median profit is negative for all years but
one. Given the concerns on profitability from the British Thoroughbred Breeders’ Association study,
one. Given the concerns on profitability from the British Thoroughbred Breeders’ Association study,
this is troubling for the sustainability of smaller breeders who may not have the capital to invest in
this is troubling for the sustainability of smaller breeders who may not have the capital to invest in
higher quality stallions. In the next section, we investigate changes to our assumptions that may lead
higher quality stallions. In the next section, we investigate changes to our assumptions that may lead
us to underestimate profit.
us to underestimate profit.
3.2. Implied Stud Fee Discount
3.2. Implied Stud Fee Discount
In the estimation of profit, we had to make a few assumptions. First, we do not have access to
actualInproduction
the estimation costs,ofsoprofit, we had
we identify twoto plausible
make a few assumptions.
levels in consultation First,with
we farm
do not have access
managers. Even to
actual production
assuming the low costs,
level ofso production
we identify costs,
two plausible levels
in general, in consultation
fewer than 50% ofwith farm managers.
profitable sales doesEven not
assuming the low level of production costs, in general, fewer than 50%
seem to be economically sustainable in the long run. So, while commission fees are generally fairly of profitable sales does not
seem to be economically sustainable in the long run. So, while commission
standard, our implicit assumption that breeders pay the advertised stud fee may be erroneous. A fees are generally fairly
standard,on
discount ourtheimplicit
advertised assumption
stud feethat
maybreeders
exist in pay
many the advertised
forms. Beyond stud fee may
a direct be erroneous.
discount, breeders A
discount on the advertised stud fee may exist in many forms. Beyond
may receive discounted stud fees by breeding multiple mares to the same stallion or at the samea direct discount, breeders may
receive
farm, discounted in
participating stud fees by partnerships
foal-share breeding multiple mares
with the to thefarm,
stallion samepurchasing
stallion or aatsyndicate
the sameshare,farm,
participating ininincentive
participating foal-share partnerships
programs with the programs,
or risk-sharing stallion farm, and sopurchasing
on. Because a syndicate
such a discountshare,
participating in incentive programs or risk-sharing programs, and so
may exist in many forms, we estimate the implied direct stud fee discount that must exist in orderon. Because such a discount
may
to exist in50%
generate many forms,
or 67% we estimate
profitable the implied
transactions direct
using Goalstud
Seek feeindiscount
Excel. The thatresults
must are
existintended
in order to to
generate 50% or 67% profitable transactions using Goal Seek in Excel. The results
capture the value of the discount that the breeder receives relative to the advertised stud fee, regardless are intended to
capture the value of the discount that the breeder receives relative to the
of the form the discount actually takes. Moreover, in spite of this exercise, it is important to note that inadvertised stud fee,
regardless
some years,ofbreeders
the form the discount
certainly actually
did not achieve takes. Moreover,
the threshold ofin spite of this
profitable salesexercise,
even withit isany
important
type of
to note that in some years,
accommodation from the stallion owner. breeders certainly did not achieve the threshold of profitable sales even
withFigure
any type of accommodation from the stallion owner.
9 presents the minimum annual implied stud fee discount required to achieve at least 50%
Figure
or 67% profitable 9 presents the minimum
sales. The annualinimplied
discount peaked 2009 andstud
2010 feewhere
discount required exceeded
the discounts to achieve80% at least
(for
50% or 67% profitable sales. The discount peaked in 2009 and 2010 where
50% profitable transactions) and 100% (for 67% profitable transactions), and was minimized in 2013 the discounts exceeded 80%
(for 2014,
and 50% profitable transactions)
where no discount was and 100% to
necessary (for 67% profitable
achieve the threshold transactions), and wastransactions.
of 50% profitable minimized in
2013 and 2014, where no discount was necessary to achieve the threshold of 50% profitable
transactions.Sustainability 2020, 12, x FOR PEER REVIEW 11 of 14
Sustainability2020,
Sustainability 2020,12,
12,463
x FOR PEER REVIEW 11 of 13
11 of 14
Implied Stud Fee Discount for a Threshold Level of Profitable
Transactions
Implied Stud Fee Discount for a Threshold Level of Profitable
150.0% Transactions
150.0%
100.0%
100.0%
50.0%
50.0%
0.0%
0.0%
67% profitable 50% profitable
67% profitable 50% profitable
Figure 9. Annual implied stud fee discount for 50% and 67% profitable transactions.
Figure 9. Annual implied stud fee discount for 50% and 67% profitable transactions.
FiguresFigure
10 and9. 11
Annual impliedthis
investigate studissue
fee discount
further for
by 50% and 67%
allowing theprofitable
implied transactions.
discount to differ across
Figures 10 and 11 investigate this issue further by allowing the implied discount to differ across
stud fee categories. Generally, demand is stronger for sires with higher stud fees. Therefore, fewer
stud fee categories.
Figures and Generally,
10 needed11 investigate demand is stronger
this issue furtherforby sires withthe
allowing higher studdiscount
implied fees. Therefore,
differ fewer
incentives are to attract mares. However, sires with lower stud fees are lesstodesirable
across
and
incentives
stud are needed to attract mares. However, sires with lower stud fees are less desirable and may
may fee categories.
require greaterGenerally,
enticements demand is stronger
to attract for For
breeders. siresthis
with higher stud
analysis, fees. consider
we only Therefore,
thefewer
50%
require greater
incentives enticements
arethreshold.
needed to to attract
attract breeders. For this analysis, we only consider the 50%desirable
profitability
profitability Figure 10mares.
presents However,
the annual sires with lower
implied stud fee stud fees are
discount forless and
commercial sires,
threshold.
may Figure 10 presents the annual implied stud fee discount for commercial sires, while Figure 11
whilerequire
Figure greater enticements
11 presents the implied to attract
discount breeders. For this analysis,
for non-commercial sires. we only consider the 50%
presents the
profitability implied discount for non-commercial sires.
Figure threshold.
10 suggests Figure
that 10 presents
among the annualsires,
commercial implied stud fee
in most discount
years, for commercial
no implied discountsires,
was
whileFigure 1011
Figure suggests
presentsthat
the among
impliedcommercial
discount sires,
for in most years, no
non-commercial implied discount was required
sires.
required to achieve 50% profitable transactions even though there were very few years in which no
to achieve
Figure 50% profitable
suggeststotransactions
10required that among even though sires,there were veryyears,
few years in whichdiscount
no discount
discount was achieve 67% commercial
profitable transactions. in most no implied was
was required to achieve 67% profitable transactions.
required to achieve 50% profitable transactions even though there were very few years in which no
discount was required to achieve 67% profitable transactions.
Implied Stud Fee Discount for 50% Profitable Transactions,
Commercial Sires
Implied Stud Fee Discount for 50% Profitable Transactions,
80.0% Commercial Sires
70.0%
80.0%
60.0%
70.0%
50.0%
60.0%
40.0%
50.0%
30.0%
40.0%
20.0%
30.0%
10.0%
20.0%
0.0%
10.0%
0.0%
$100,000+ $50,000–$99,999 $25,000–$49,999
$100,000+
Figure 10. Annual implied $50,000–$99,999
stud fee discount $25,000–$49,999
for 50% profitable transactions for commercial sires.
Figure 10. Annual implied stud fee discount for 50% profitable transactions for commercial sires.
Figure 1110.demonstrates
Figure 11
a much
Annual impliedastud
different for
fee discount
result. For the bottom
50% profitable
two stud fee categories, the
Figure demonstrates much different result. For the transactions
bottom twoforstud
commercial sires.
fee categories, the
implied stud fee discount is over 100%, indicating that even if the stud fee was waived, the transaction
implied stud fee discount is over 100%, indicating that even if the stud fee was waived, the transaction
wouldFigure
still not
11have been profitable.
demonstrates a much So,different
even if there areFor
result. breeders raisingtwo
the bottom yearlings
stud feeon categories,
a “shoestring”
the
implied stud fee discount is over 100%, indicating that even if the stud fee was waived, the transactionSustainability 2020, 12, x FOR PEER REVIEW 12 of 14
Sustainability 2020, 12, 463 12 of 13
would still not have been profitable. So, even if there are breeders raising yearlings on a “shoestring”
budget, realizing a positive economic return is unlikely. With a few exceptions, the implied discount
was always
budget, greater
realizing than 0%,
a positive and often
economic above
return 50%. Taken
is unlikely. together,
With these results
a few exceptions, thesuggest
impliedthat selling
discount
yearlings
was alwaysbygreater
non-commercial sires
than 0%, and is not
often likely
above to be
50%. a profitable
Taken venture.
together, these results suggest that selling
yearlings by non-commercial sires is not likely to be a profitable venture.
Implied Stud Fee Discount for 50% Profitable Transactions, Non-
commercial Sires
600.0%
500.0%
400.0%
300.0%
200.0%
100.0%
0.0%
$15,000–$24,999 $10,000–$14,999 $5000–$9999 < $5000
Figure 11. Annual implied stud fee discount for 50% profitable transactions for commercial sires.
Figure 11. Annual implied stud fee discount for 50% profitable transactions for commercial sires.
4. Discussion
4. Discussion
This study investigates the profitability of commercial Thoroughbred breeders in North American
from 2001–2018.
This study We find that while
investigates average profit
the profitability of iscommercial
positive over the 18-year period,
Thoroughbred breeders theinmean is
North
driven
Americanby a from
few outliers.
2001–2018. On average,
We find fewer than 50%
that while averageof transactions are profitable,
profit is positive over theand median
18-year profitthe
period, is
nearly always negative. In addition, we find that the likelihood of realizing
mean is driven by a few outliers. On average, fewer than 50% of transactions are profitable, and a positive economic return
on a transaction
median profit isisnearly
greater for yearlings
always negative. byInhigher
addition,quality stallions.
we find that the Finally, in many
likelihood instances,
of realizing even if
a positive
breeders had received a complimentary stud fee, profit would still have been
economic return on a transaction is greater for yearlings by higher quality stallions. Finally, in many negative. Taken together,
these resultseven
instances, suggest that the market
if breeders for Thoroughbred
had received a complimentary yearlings is quite
stud polarized.
fee, profit wouldConsequently,
still have been the
long-run
negative.sustainability
Taken together, for many of thesesuggest
these results breeders is uncertain,
that the marketespecially for breeders
for Thoroughbred that may
yearlings lack
is quite
the capital to invest in high quality stallions.
polarized. Consequently, the long-run sustainability for many of these breeders is uncertain,
Some participants
especially for breeders in the
that racing
may lackand breeding
the capital to industry, especially
invest in high qualitythose in the upper echelons,
stallions.
have made
Sometheir fortunes in
participants in the
other industries
racing such as oil,
and breeding telecommunications,
industry, especially those andin banking.
the upper Profitability
echelons,
may not be a primary objective for these participants; however, any
have made their fortunes in other industries such as oil, telecommunications, and banking. business must show a profit motive
or the activitymay
Profitability willnot be classified
be a primary as aobjective
hobby, and for expenses associated
these participants; with theany
however, activity will must
business not beshowtax
deductible. However, for those in the industry without other major sources
a profit motive or the activity will be classified as a hobby, and expenses associated with the activity of income, their operations
are
willsubject
not betotaxthe same rules
deductible. of production
However, for thoseas any other
in the firm. without
industry Continually otherproducing
major sourcesat a loss is not
of income,
sustainable,
their operationsand in arethe long run,
subject to thethese
same operations would be required
rules of production as any otherto shut
firm.down.
Continually producing
There are a few limitations to the approach we adopted in
at a loss is not sustainable, and in the long run, these operations would be required this study. First, although to we
shutultimately
down.
consider only the lowest production cost, it is possible that production
There are a few limitations to the approach we adopted in this study. First, although we costs are still overestimated.
In addition, consider
ultimately it is possibleonly that
the breeders often pay less
lowest production cost,than
it isthe advertised
possible stud fee. Tocosts
that production account
are for
still
this, we determined the implied stud fee discount that would yield a threshold
overestimated. In addition, it is possible that breeders often pay less than the advertised stud fee. To level of profitable
transactions.
account for this,Third, weitdetermined
is possible that the the percentage
implied stud fee of discount
profitablethattransactions
would yield is not the best measure
a threshold level of
ofprofitable
profitability
transactions. Third, it is possible that the percentage of profitable transactions isand
to consider. Many commercial breeders likely own more than one broodmare notsell
the
multiple yearlings in any given year. In this case, the return on the
best measure of profitability to consider. Many commercial breeders likely own more than one portfolio would be a more accurate
measure
broodmare of profitability.
and sell multiple However, due toin
yearlings dataanylimitations,
given year. weInare
thisunable
case, to
thepursue
returnthisonapproach.
the portfolioSustainability 2020, 12, 463 13 of 13
A significant contributor to breeder profit is the price that buyers are willing to pay for young
Thoroughbreds. Future research plans include investigating factors influencing price at the market
level. For example, in the year following a highly televised breakdown, did yearling profitability
decrease? Or, in the event of a welcome anomaly, such as American Pharaoh becoming the first Triple
Crown winner in 37 years, would enthusiasm be renewed? Also, to what extent do macroeconomic
factors, such as interest rates, exchange rates, capital gains tax rates, and tax benefits (like accelerated
depreciation) influence prices? Karungu, Reed, and Tvedt study some of these factors, but those results
are now 25 years old [13]. Finally, it would be interesting and useful to develop a model capable
of forecasting cycles in the market. Because there are no futures markets for Thoroughbreds, and
because of the biological constraints involved in producing Thoroughbreds, it may be possible to
identify leading indicators to forecast median or average prices. This type of tool may be able to benefit
breeders in their ability to anticipate expected returns and make decisions accordingly.
Author Contributions: Conceptualization, C.J.S.; methodology, J.B. and C.J.S.; formal analysis, J.B. and C.J.S.;
data curation, J.B.; writing—original draft preparation, J.B. and C.J.S.; writing—review and editing, J.B. and C.J.S.
All authors have read and agreed to the published version of the manuscript.
Funding: This work is supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture,
Hatch Project, under accession number 1014277.
Conflicts of Interest: The authors declare no conflict of interest.
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