By Sid Fernando
Let's cut to the chase. The recent dictum from The Jockey Club (TJC) that North American stallions born in 2020 and forward will be limited to covering 140 mares in a calendar year is an attempt to divert mares from popular stallions to others not as in demand. It's a simplistic approach to a complex issue, and it's akin to applying a Band-Aid to a cut that requires stitches.
These days, stallions that need help the most are third- and fourth-year horses and proven mid-priced bread-and-butter stallions with some age on them. Why? Because they aren't commercially popular in the sales ring. In contrast, first-year sires and elite-level stallions are, and they tend to attract the greatest number of mares because most breeders, especially in Kentucky, are planning matings for the sales ring.
Breeders who sell do not like the risk exposure of going to market with a yearling whose sire will have 3-year-olds or 4-year-olds at the track, which is what happens when you breed to a stallion in his third and fourth years at stud. Why are commercial breeders averse to this practice and why is it risky? Because if those runners haven't amounted to much by sales time, those yearlings will be devalued in the sales ring.
For as long as this paradigm continues, risk-averse commercial breeders will not patronize those third- and fourth-year stallions like they do first-year or elite proven horses, regardless of TJC's intervention. Neither will they suddenly decide to breed to mid-priced proven horses whose progeny don't make money at the sales.
So, what will happen when horses are limited to 140 mares? Perhaps more horses will enter stud to satisfy first-year stallion demand, which is a good thing, because this can add diversity to the stallion pool. But more than likely the cycle I described above will continue for them, too, with these horses suffering in their third and fourth years at stud. Essentially, the mare cap will probably exacerbate the problem that currently exists, instead of curing the issue, and we'll have more horses being sold to Turkey or South Korea or somewhere else in their fourth, fifth, and sixth years at stud, which is what happens now when stallions don't get off the mark right away and farms weigh lucrative foreign offers against dwindling stud-fee income.
Under the current paradigm without a mare cap, stud farms try to make back most of their investment in a stallion in the first year or two by breeding as many mares as they can to him, because they know by years three and four, books are tougher to fill. Frequently, fees are also discounted in these later years to attract mares, so the equation then becomes less mares times lower fees equal less income.
Here's some back-of-napkin math to illustrate the current model versus what could potentially be the new model of the future, and you'll note the potential depreciation in value that could take place: If a farm spends $1.5 million on a stallion prospect now and breeds 180 mares to him the first year at a $10,000 fee, with 150 (about 83%) delivering live foals the next spring, that's $1.5 million in income ($10,000 x 150 live foals) on paper. Under the new rule, say the stallion was bred to 140 mares and 115 (about 83%) produced foals, generating income of $1.15 million. That's a difference of $350,000, or about 25% from the first scenario. It's reasonable assumption, therefore, that stallion prospects will potentially be devalued by 25% in the future, which has ramifications for the yearling markets, too, because potential buyers of colts could adjust spending limits accordingly, creating a chain reaction.
Changing the Paradigm
A few years ago at the Saratoga sales, Claiborne's Bernie Sams, speaking to me and Walker Hancock in an empty pavilion one morning, turned around and gestured to the back walking ring and said, “Everybody's very focused on [selling]. They don't want to own a set of [racing] silks. They don't want to pay a trainer.”
If racing instead of selling was the goal, more third- and fourth-year horses and the mid-level proven ones would get an uptick in business because breeders wouldn't avoid them if the sales ring wasn't the primary concern. In fact, they'd probably be more attractive to some breeders, starting with fee discounts in the third and fourth years. And horses with reliable sire performance at a reasonable fee–which have historically been the backbone of breeding-to-race programs, which value racetrack statistics over unproven hype–would find an audience again.
So how do we change the paradigm? Well, what about offering financial incentives for breeders to race? One way to do this on a national platform is through the Breeders' Cup, which is funded to begin with by stud fees and foal nominations. There's nothing like offering money to change behavior, and the Breeders' Cup could accomplish this by awarding bonuses to owner-breeders for winning or placing in its Challenge Series of races. If a horse has multiple owners and one is the breeder, a percentage of the award could be allocated for that owner. And on Breeders' Cup days, these awards could be increased, commensurate with the purses. A program like this could begin the gradual process of transitioning some commercial breeders into owner-breeders, which could in turn address some of the issues of filling books.
TJC could have acted in concert with the Breeders' Cup to develop such a plan, and it could have worked with various state organizations and tracks to find other ways to reward owner-breeders in maiden and allowance races as well, as many state-bred programs do. I'm sure there are many other schemes that could financially incentivize people to race some of the horses they breed, and as the breed's registrar, TJC should prioritize that mission. It's not too late for them to do that.
The timing of TJC's controversial mare-cap announcement during the height of a pandemic wasn't a good PR maneuver for its brand, which has been taking some hits in recent years for its lobbying towards the passage of the Horseracing Integrity Act in Congress. Breeders, owners, and stud farms already have a lot on their plates to deal with now, including potential loss of income from the economic collapse, and they didn't need yet another issue to splinter their community. Also, there's a chance that the economic effects of the coronavirus could naturally change behavior and limit books in the foreseeable future through cash-flow squeezes, anyway.
One of the catch phrases of the Integrity Act is “international harmonization” as it relates to bringing U.S. medication rules into line with those around the world, but one of the ironies of TJC's mare cap is its departure from international norms that don't place restrictions on the number of mares that stallions can breed. There are no such rules in Europe, Japan, or Australasia, which means that U.S. stud farms will be somewhat handicapped going forward in international trade.
Here's a concrete example to illustrate this: Coolmore landed Justify for a reported value of $75 million because it factored in large domestic books and the shuttling of the horse to Australia into its calculations. Last year, Justify covered 252 mares at a fee of $150,000. If he got 210 live foals, that's a paper value of about $31 million in income, excluding monies from the Southern Hemisphere. With a mare cap in place, it's doubtful that Coolmore would have made the offer it did, and it's just as likely that WinStar may have sold the horse to a Japanese syndicate that offered almost as much as Coolmore did. In fact, Elliott Walden confirmed that possibility to me recently but noted that it was WinStar's desire to keep the Triple Crown winner at stud in the U.S., which Coolmore facilitated.
All of this brings up legal issues of trade restrictions. Recently, a TJC steward said he couldn't speak to me about the mare cap because of “discovery” issues that could arise from legal proceedings, which TJC is no doubt expecting and prepared to face. It's a battle that could get bloody.
Is it worth the price?
For a more detailed piece on third- and fourth-year sires, please see this column.
Sid Fernando is president and CEO of Werk Thoroughbred Consultants, Inc., originator of the Werk Nick Rating and eNicks.