Estimated Profitability of Thoroughbred Yearlings Sold in Auctions in the United States, 2001–2018

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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; [email protected] * Correspondence: [email protected]

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/sustainability Sustainability 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 mares Sustainability 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. Table1 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 that Sustainability 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 Figure1 depicts inﬂation-adjusted average and median sales prices from 2001–2018. Inspection of Figure1 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,, 12,, 463x FOR PEER REVIEW 55 of of 1314

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. Table2 presents average nominal profit, average inflation-adjusted profit in 2018 dollars, and the percentageTable 2 presents of profitable average sales nominal annually profit, from average 2001 inflation-adjusted to 2018. Overall, profit under in the 2018 assumption dollars, and of lowthe percentage production of costs, profitable 44.4% sales of yearling annually sales from were 2001 profitable, to 2018. Overall, while under under the the assumption assumption of of high low production costs,costs, 36.1%44.4% ofof all yearling yearling sales sales were were profitable, profitable. while In 2009 under and 2010,the assumption average profit of high was negativeproduction under costs, the 36.1% assumption of all yearling of high productionsales 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 HighInflation-Adjusted Production Costs LowInflation-Adjusted Production Costs Nominal Nominal Sale Year Inflation-AdjustedProfit % Profitable Inflation-AdjustedProfit % Profitable Nominal % Nominal Sale Year Profit Profit Profit Profit % Profitable Profit (2018 Dollars) Profitable Profit (2018 Dollars) (2018 dollars) (2018 dollars) 20012001 $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% 20022002 $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% 20032003 $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% 20042004 $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% 20052005 $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% 20062006 $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% 20072007 $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% 20082008 $9623.41 $9623.41 $11,223.59 $11,223.59 33.9% 33.9% $22,484.82 $22,484.82 $26,223.59 $26,223.59 41.9% 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% 20112010 $3323.97$(11,904.63) $(13,705.88) $3711.20 29.3% 23.1% $16,758.85 $1124.04 $18,711.19$1294.11 29.5% 36.6% 20122011 $12,627.91 $3323.97 $13,810.40 $3711.20 35.0% 29.3% $26,343.56 $16,758.85 $18,711.19 $28,810.40 36.6% 44.9% 20132012 $27,598.60 $12,627.91 $13,810.40 $29,742.53 42.2% 35.0% $41,517.35 $26,343.56 $28,810.40 $44,742.52 44.9% 52.6% 20142013 $25,144.80 $27,598.60 $29,742.53 $26,674.52 40.4% 42.2% $39,284.58 $41,517.35 $44,742.52 $41,674.52 52.6% 51.3% 20152014 $26,897.26 $25,144.80 $26,674.52 $28,497.48 40.4% 40.4% $41,054.96 $39,284.58 $41,674.52 $43,497.47 51.3% 48.8% 20162015 $23,330.58 $26,897.26 $28,497.48 $24,409.62 37.1% 40.4% $37,667.50 $41,054.96 $43,497.47 $39,409.62 48.8% 45.2% 20172016 $35,596.53 $23,330.58 $24,409.62 $36,467.93 41.2% 37.1% $50,238.11 $37,667.50 $39,409.62 $51,467.93 45.2% 49.2% 2018 $36,732.77 $36,732.77 39.9% $51,732.77 $51,732.77 48.8% 2017 $35,596.53 $36,467.93 41.2% $50,238.11 $51,467.93 49.2% Total2018 $20,263.61 $36,732.77 $36,732.7736.1% 39.9% $33,219.45 $51,732.77 $51,732.77 48.8%44.4% 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 Figure2 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 of Profitable appear toSales remain Under relatively 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%

30.0%40.0%

20.0%30.0%

10.0%20.0%

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% Profitable 2005 2006 (High 2007 2008 Cost) 2009 2010 2011% 2012Profitable 2013 2014(Low 2015 Cost) 2016 2017 2018 % 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 Figureassumptions. 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 analysesFor theare remainderconducted ofunder the paper,the assumpti to err onon ofthe low side production of not underestimating costs ($20,000). profit, all further are conducted under the assumption of low production costs ($20,000). analysesFigures are conducted3 and 4 underillustrate the assumptiestimatedon ofinflation- low productionadjusted costsprofit ($20,000). at the 99th, 95th, and 75th Figures3 and4 illustrate estimated inflation-adjusted profit at the 99th, 95th, and 75th percentiles percentilesFigures (Figure 3 and 3)4 asillustrate well as estimatedthe 50th, 25th,inflation- andadjusted 5th percentiles profit at(Figure the 99th, 4). While 95th, thereand 75thmay be (Figure3) as well as the 50th, 25th, and 5th percentiles (Figure4). While there may be positive economic positivepercentiles economic (Figure 3)returns as well on as averagethe 50th, in 25th, a given and 5th year, percentiles this exercise (Figure demonstrates 4). While there that may with be the returns on average in a given year, this exercise demonstrates that with the exception of 2013 and 2014, exceptionpositive economic of 2013 and returns 2014, on median average profit in afor given breede year,rs was this estimated exercise demonstratesto be negative. that In otherwith words,the median profit for breeders was estimated to be negative. In other words, a few especially lucrative aexception few especially of 2013 lucrative and 2014, transactions median profit may for yield breede anrs overall was estimated positive returnto be negative. enough Inthough other fewerwords, than transactions may yield an overall positive return enough though fewer than 50% of transactions are 50%a few of especially transactions lucrative are transactionsprofitable. Moreover, may yield anFigure overall 4 positiveillustrates return sizable enough losses though incurred fewer by than many profitable. Moreover, Figure4 illustrates sizable losses incurred by many breeders in the aftermath of breeders50% of transactions in the aftermath are profitable. of the Great Moreover, Recession. Figure 4 illustrates sizable losses incurred by many breedersthe Great in Recession. 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

$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

p99p99 p95p95 p75p75

FigureFigureFigure 3. 3. 99th, 99th,99th, 95th, 95th, 95th, and and and 75th 75th 75th percentiles percentiles percentiles for for for inflation-adjusted inflation-adjusted inﬂation-adjusted profit, profit, proﬁt, 2001–2018. 2001–2018. SustainabilitySustainability 20202020,, 1212,, 463x FOR PEER REVIEW 77 of 1314

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 by studWhat fee category.follows Theexamines industry inflation-adjusted typically considers me “commercialdian profit sires”and topercen be thosetage with of advertisedprofitable studtransactions fees of by at leaststud $25,000fee category. (some The industry industry sources typically consider considers stallions “commercial with stud sires” fees to of be $15,000 those andwith aboveadvertised to be stud commercial, fees of at butleast our $25,000 analysis (some shows industry that sources fewer than consider half stallions of transactions with stud in thisfees categoryof $15,000 were and profitable).above to be commercial, Figures5 and but6 present our analysis inflation-adjusted shows that fewer median than profit half of for transactions commercial in andthis non-commercialcategory were sires,profitable). respectively. Figures The 5 diandfferences 6 present in the inflation-adjusted two figures is unmistakable. median profit Figure for5 suggestscommercial that and median non-commercial profit is nearly sires, always respectively. positive for yearlingsThe differences by commercial in the sires two and figures that the is largestunmistakable. median profitFigure is 5 earned suggests by yearlingsthat median with theprofit highest is nearly quality always sires (notably,positive though,for yearlings when theby economycommercial experiences sires and downturnsthat the largest such median as the Greatprofit Recession,is earned by those yearlings breeders with also the stand highest to lose quality the most).sires (notably, In contrast, though, Figure when6 illustrates the economy nearly experience guaranteeds downturns negative median such as profit the acrossGreat Recession, all categories those of non-commercialbreeders also stand sires. to Together, lose the Figuresmost). 5In and contrast,6 tell the Figure story 6 of illustrates a polarized nearly market guaranteed in which thenegative best qualitymedian individuals profit across are all in categories high demand, of non-commercia but demand forl sires. individuals Together, falling Figures short 5 and of that 6 tell ideal the isstory weak. of a polarizedNext, Table market3 presents in which the percentagethe best quality of profitable individuals transactions are in high by stud demand, fee. From but 2001 demand to 2018, for overindividuals 45% of falling the yearlings short of soldthat ideal were is by weak. “commercial” sires. The percentage of profitable sales is monotonicallyNext, Table decreasing 3 presents from the thepercentage highest of stud profitable fee category transactions (57.6%) toby thestud lowest fee. From (19.7%). 2001 Breeders to 2018, withover the45% initial of the means yearlings to invest sold in were a higher by quality“commercial” stallion sires. based The on advertised percentage stud of feeprofitable stand a sales greater is chancemonotonically of realizing decreasing positive from economic the highest returns. stud fee category (57.6%) to the lowest (19.7%). Breeders 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)

Figure 5. Inflation-adjusted$100,000+ $50,000–$99,999 median profit for offspring$25,000–$49,999 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

$5,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $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–$24,9996. Inflation-adjusted $10,000–$14,999median profit for offspring$5000–$9999 of non-commercial< $5000 sires.

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.

StudTable Fee 3.CategoryPercentage of proﬁtable% Profitable sales by stud n fee category. % of Total

Stud$100,000+ Fee Category % Proﬁtable57.6% n5125 % 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 57.0%51.7% 802120,906 10.7%28.0% $15,000–$24,999$25,000–$49,999 51.7%41.7% 20,90616,623 28.0%22.2% $10,000–$14,999$15,000–$24,999 41.7%38.2% 16,62312,658 22.2%16.9% $5000–$9999$10,000–$14,999 38.2%28.1% 12,65810,314 16.9%13.8% Less $5000–$9999than $5000 28.1% 19.7% 10,314 1142 13.8% 1.5% Less than $5000 19.7% 1142 1.5% TotalTotal 44.4%44.4% 74,78974,789 100%100%

Figures 7 and 8 illustrate percentage of profitable transactions among yearlings by commercial siresFigures and non-commercial7 and8 illustrate sires, percentage respectively, of profitable from 20 transactions01 to 2018. For among most yearlingsyears, investing by commercial in the top sirestier of and stallions non-commercial (stud fees of sires, $100,000 respectively, and up) fromresulted 2001 into the 2018. greatest For percentage most years, of investing profitable in sales, the topalthough tier of there stallions are a (stud few exceptions fees of $100,000. The largest and up) deviations resulted occurred in the greatest in the years percentage following of profitable the Great sales,Recession, although where there breeders are a few paid exceptions. peak stud The largestfees but deviations experienced occurred significant in the yearsdeclines following in prices. the GreatYearlings Recession, by sires where in the breederslowest stud paid fees peak of the stud commercial fees but experienced sires ($25,000–$49,999) significant declinesappear to in have prices. the Yearlingsmost predictable by sires inpattern the lowest of profitable stud fees sales, of the exhibiting commercial less sires extreme ($25,000–$49,999) deviations in appear times toof haveboom the or mostbust. predictableFigure 6 depicts pattern the ofsame profitable measure sales, for yearli exhibitingngs by less non-commercial extreme deviations sires. While in times the of percentage boom or bust.of profitable Figure6 depictssales is thegenerally same measure decreasing for yearlingsfrom higher by non-commercialstud fees to lower sires. ones, While there the is percentage significant ofvariability profitable in sales these is measures generally from decreasing year to fromyear. higherIn addition, stud feesthere to were lower no ones,profitable there transactions is significant in variability2010 in the in lowest these stud measures fee category, from year even to year.under In the addition, assumption there of were low noproduction profitable costs. 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 actualIn production the estimation costs, of so profit, we identify we had two to plausiblemake a few levels assumptions. in consultation First, with we farmdo not managers. have access Even to assumingactual production the low costs, level ofso productionwe identify costs,two plausibl in general,e levels fewer in consultation than 50% of with profitable farm managers. sales does Even not seemassuming to be the economically low level of sustainable production in costs, the long in general, run. So, fewer while than commission 50% of profitable fees are generally sales does fairly not standard,seem to be our economically implicit assumption sustainable that in breedersthe long run. pay So, the while advertised commission stud fee fees may are be generally erroneous. fairly A discountstandard, on our the implicit advertised assumption stud fee that may breeders exist in pa manyy the forms. advertised Beyond stud a directfee may discount, be erroneous. breeders A maydiscount receive on the discounted advertised stud stud fees fee bymay breeding exist in ma multipleny forms. mares Beyond to the a direct same stalliondiscount, or breeders at the same may farm,receive participating discounted instud foal-share fees by partnershipsbreeding multiple with themares stallion to the farm, same purchasing stallion or aat syndicate the same share,farm, participatingparticipating inin incentive foal-share programs partnerships or risk-sharing with the programs,stallion farm, and sopurchasing on. Because a syndicate such a discount share, mayparticipating exist in many in incentive forms, weprograms estimate or therisk-sharing implied direct programs, stud feeand discount so on. Because that must such exist a discount in order tomay generate exist in 50% many or 67%forms, profitable we estimate transactions the implied using direct Goal stud Seek fee in discount Excel. The that results must areexist intended in order toto capturegenerate the 50% value or of67% the profitable discount thattransactions the breeder using receives Goal relative Seek in to Excel. the advertised The results stud are fee, intended regardless to ofcapture the form the the value discount of the actually discount takes. that Moreover, the breeder in spite receives of this exercise,relative itto is the important advertised to note stud that fee, in someregardless years, of breeders the form certainly the discount did not actually achieve takes. the threshold Moreover, of in profitable spite of this sales exercise, even with it is any important type of accommodationto note that in some from years, the stallion breeders owner. certainly did not achieve the threshold of profitable sales even withFigure any type9 presents of accommodation the minimum from annual the impliedstallion owner. stud fee discount required to achieve at least 50% or 67%Figure profitable 9 presents sales. Thethe minimum discount peaked annual in implied 2009 and stud 2010 fee where discount the discountsrequired exceededto achieve 80% at least (for 50%50% profitableor 67% profitable transactions) sales. The and discount 100% (for peaked 67% profitable in 2009 and transactions), 2010 where andthe discounts was minimized exceeded in 2013 80% and(for 2014,50% profitable where no discounttransactions) was and necessary 100% to(for achieve 67% profitable the threshold transactions), of 50% profitable and was transactions. 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

SustainabilitySustainability2020 2020, ,12 12,, 463 x FOR PEER REVIEW 11 of of 13 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 and 9. 11Annual investigate implied this stud issue fee discount further forby 50%allowing and 67% the profitable 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. Generally, demand is stronger for sires with higher stud fees. Therefore, fewer incentivesFigures are 10 neededand 11 investigateto attract mares. this issue However, further siresby allowing with lower the impliedstud fees discount are less to desirable differ across and incentives are needed to attract mares. However, sires with lower stud fees are less desirable and may studmay feerequire categories. greater Generally, enticements demand to attract is stronger breeders. for Forsires this with analysis, higher studwe only fees. considerTherefore, the fewer 50% require greater enticements to attract breeders. For this analysis, we only consider the 50% profitability incentivesprofitability are threshold. needed to Figure attract 10 mares. presents However, the annual sires implied with lowerstud fee stud discount fees are for less commercial desirable sires, and threshold. Figure 10 presents the annual implied stud fee discount for commercial sires, while Figure 11 maywhile require Figure greater11 presents enticements the implied to attractdiscount breeders. for non-commercial For this analysis, sires. we only consider the 50% presents the implied discount for non-commercial sires. profitabilityFigure threshold.10 suggests Figure that 10among presents commercial the annual sires, implied in moststud feeyears, discount no implied for commercial discount sires, was Figure 10 suggests that among commercial sires, in most years, no implied discount was required whilerequired Figure to achieve 11 presents 50% theprofitable implied transactions discount for ev non-commercialen though there sires. were very few years in which no to achieve 50% profitable transactions even though there were very few years in which no discount discountFigure was 10 required suggests to thatachieve among 67% commercialprofitable transactions. sires, in most years, no implied discount was wasrequired required to achieve to achieve 50% 67% profitable profitable transactions 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 80.0%70.0%

70.0%60.0%

60.0%50.0%

50.0%40.0%

40.0%30.0%

30.0%20.0%

20.0%10.0%

10.0%0.0%

0.0%

$100,000+ $50,000–$99,999 $25,000–$49,999

Figure 10. Annual implied$100,000+ stud fee discount$50,000–$99,999 for 50% profitable transactions$25,000–$49,999 for commercial sires. Figure 10. Annual implied stud fee discount for 50% profitable transactions for commercial sires. Figure 11 demonstrates a much different result. For the bottom two stud fee categories, the FigureFigure 1110. demonstratesAnnual implied a stud much fee discountdifferent for result. 50% profitable For the transactionsbottom two for stud commercial fee categories, sires. 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 11 havedemonstrates been profitable. a much So, different even if thereresult. are For breeders the bottom raising two yearlings stud fee on categories, a “shoestring” the implied stud fee discount is over 100%, indicating that even if the stud fee was waived, the transaction Sustainability 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 budget,was always realizing greater a positive than 0%, economic and often return above is unlikely.50%. Taken With together, a few exceptions, these results the suggest implied that discount selling wasyearlings always by greater non-commercial than 0%, and sires often is not above likely 50%. to be Taken a profitable together, venture. 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. DiscussionThis study investigates the profitability of commercial Thoroughbred breeders in North American from 2001–2018.This study Weinvestigates find that whilethe profitability average profit of iscommercial positive over Thoroughbred the 18-year period,breeders the in mean North is drivenAmerican by a from few outliers. 2001–2018. On average,We find fewerthat while than 50%average of transactions profit is positive are profitable, over the and 18-year median period, profit the is nearlymean alwaysis driven negative. by a few In addition,outliers. weOn findaverage, that thefewer likelihood than 50% of realizing of transactions a positive are economic profitable, return and onmedian a transaction profit is isnearly greater always for yearlings negative. by In higher addition quality, we find stallions. that the Finally, likelihood in many of realizing instances, a positive even if breederseconomic had return received on a atransaction complimentary is greater stud for fee, yearlings profit would by higher still have quality been stallions. negative. Finally, Taken together, in many theseinstances, results even suggest if breeders that the markethad received for Thoroughbred a complimentary yearlings stud is quitefee, profit polarized. would Consequently, still have been the long-runnegative. sustainability Taken together, for manythese results of these suggest breeders that is uncertain,the market especially for Thoroughbred for breeders yearlings that may is quite lack thepolarized. capital toConsequently, invest in high qualitythe long-run stallions. sustainability for many of these breeders is uncertain, especiallySome participantsfor breeders inthat the may racing lack and the capital breeding to industry,invest in high especially quality those stallions. in the upper echelons, have madeSome theirparticipants fortunes in in the other racing industries and breeding such as oil, industry, telecommunications, especially those and in banking. the upper Profitability echelons, mayhave not made be a primarytheir fortunes objective in for other these participants;industries such however, as oil, any telecommunications, business must show aand profit banking. motive orProfitability the activity may will not be classifiedbe a primary as aobjective hobby, and for expensesthese participants; associated however, with the any activity business will must not be show tax deductible.a profit motive However, or the for activity those will in the be industry classified without as a hobby, other and major expenses sources associated of income, theirwith operationsthe activity arewill subject not be totax the deductible. same rules However, of production for those as anyin the other industry firm. without Continually other producing major sources at a lossof income, is not sustainable,their operations and inare the subject long run,to the these same operations rules of production would be requiredas any other to shut firm. down. Continually producing at a Thereloss is arenot a sustainable, few limitations and to in the the approach long run, we these adopted operations in this would study. First,be required although to weshut ultimately down. considerThere only are the a lowestfew limitations production to cost,the itapproach is possible we that adopted production in this costs study. are stillFirst, overestimated. although we Inultimately addition, consider it is possible only thatthe breederslowest production often pay lesscost, than it is thepossible advertised that production stud fee. To costs account are forstill this,overestimated. we determined In addition, the implied it is po studssible fee that discount breeders that often would pay yield less than a threshold the advertised level of stud profitable fee. To transactions.account for this, Third, we it determined is possible that the theimplied percentage stud fee of discount profitable that transactions would yield is not a threshold the best measure level of ofprofitable profitability transactions. to consider. Third, Many it commercialis possible that breeders the percentage likely own of more profitable than one transactions broodmare is and not sell the multiplebest measure yearlings of profitability in any given year.to consider. In this case,Many the commercial return on the breeders portfolio likely would own be amore more than accurate one measurebroodmare of profitability. and sell multiple However, yearlings due to in data any limitations, given year. we In are this unable case, tothe pursue return this on approach.the portfolio Sustainability 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.

References and Notes

1. The Contribution of Thoroughbred Breeding to the UK Economy and Factors Impacting the Industry’s Supply Chain. Thoroughbred Breeders’ Assocation: Great Britain, UK, 2018. Available online: https: //www.thetba.co.uk/wp-content/uploads/2018/09/TBA-Economic-Impact-Study-2018.pdf (accessed on 26 December 2019). 2. 2019 Fact Book; The Jockey Club: Lexington, KY, USA, 2019. Available online: http://www.jockeyclub.com/ Default.asp?section=Resources&area=11 (accessed on 26 December 2019). 3. 2018 Auctions Digest; Blood-Horse, LLC: Lexington, KY, USA, 2018; p. 56. 4. 2012 Auctions Digest; Blood-Horse LLC: Lexington, KY, USA, 2012; p. 1. 5. 2010 Auctions Digest; Blood-Horse LLC: Lexington, KY, USA, 2010; p. 3877. 6. Keeneland Sales Summaries. 2019. Available online: http://flex.keeneland.com/summaries/summaries.html (accessed on 26 December 2019). 7. Fasig-Tipton Results Archive. 2019. Available online: http://www.fasigtipton.com/results/2019 (accessed on 26 December 2019). 8. Nutt, P.; Clark, M.; Graycarek, R.; Hall, C.T.; Roenker, J. The Kentucky Thoroughbred Breeding Industry and State Programs that Assist the Equine Industry; Legislative Research Commission: Frankfort, KY, USA, 2011. 9. Neibergs, J.S.; Vinzant, P.L. Maximum-Likelihood Estimates of Racehorse Earnings and Profitability. J. Agribus. 1999, 17, 37–48. 10. Bosh, K.A.; Powell, D.; Neibergs, J.S.; Shelton, B.; Zent, W. Impact of reproductive efficiency over time and mare financial value on economic returns among Thoroughbred mares in central Kentucky. Equine Vet. J. 2009, 41, 889–894. [CrossRef][PubMed] 11. Gamrat, F.A.; Sauer, R.D. The utility of sport and returns to ownership: Evidence from the thoroughbred market. J. Sports Econ. 2000, 1, 219–235. [CrossRef] 12. Consumer Price Index—All Urban Consumers, 2001–2018. 2019. Available online: http://data.bls.gov (accessed on 28 October 2019). 13. Karungu, P.; Reed, M.; Tvedt, D. Macroeconomic Factors and the Thoroughbred Industry. J. Agric. Appl. Econ. 1993, 25, 165–173. [CrossRef]

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