Even as the results rolled in from auctions trumpeting record returns over the past half-decade, it would be hard to find anyone to proclaim the current commercial Thoroughbred marketplace is the same one that reached the dizzying heights of the 1980s, or even the mid-2000s.
One of the clearest indicators of that fact is how drastically the amount of money that's currently out on equine loans has diminished, along with the number of banks that offer them. Though the market has clawed its way back since the crash of the late 2000s, the fact that there are only a small handful of banks left that offer equine loans suggest that segment of the marketplace has not filled out as much as it may seem.
“Lending against horseflesh is definitely down from 2008 and we are unlikely to see that level again,” said Peter Costich, who handles equine lending for Limestone Bank in Lexington, Ky. “Equine loans totaled around $1 billion at that time. We estimate today's total is less than half of that.”
Equine loans can be taken out in three major areas: Loans on the plant, which consists primarily of property loans on farms; loans on equipment, in this case the horses themselves; and loans on operation, with a scope that includes stud fees.
For many horsepeople in Central Kentucky, business doesn't get started without a loan, so lending activity can provide a forecast of what the coming few years of industry activity might look like.
In the short term, the global economy is still trying to figure itself out due to COVID-19, and the racing industry will have some hard questions to ask about its business model if fans – and their live handle – remain out of the grandstands for an extended period of time. Despite this, equine lending activity has rolled on almost unchanged in 2020.
The long-range forecast paints a different picture. Though the uncertainties surrounding COVID-19 may not have immediately affected the bloodstock economy in terms of loan money taken out, Bob Feenick of Farmers National Bank said the ever-polarizing returns of recent years have threatened to catch up with the industry, and market instability elsewhere in the Thoroughbred business and the world at large, might speed up that chase.
“The last few years, we've seen the polarization in the marketplace – a supply and demand problem is what I call it – and how it sorts itself out,” he said. “I think the target for my customers has been getting narrower for the last few years. Even though the numbers get higher, the cost behind it gets higher and the people participating in those good returns has gotten narrower.”
This is important on two fronts. First, the potential clash between supply and demand comes at a time when the North American foal crop is at its lowest point since the 1960s. When the downturn of the late 1980s occurred, the foal crop was at record highs of over 50,000 per year. During the market crash of the late 2000s, that number was still around 30,000. Today, the North American foal crop will be hard-pressed to reach 20,000.
There are fewer foals being born, and in turn, fewer players in the game needing loans to get their initiatives off the ground. Because that group is smaller, Costich said the number of banks devoting resources to equine lending has also withered.
“I would attribute this to banks no longer having expertise in the business,” he said. “The larger institutions are less willing to invest the time and resources equine lending requires. Over time, for one reason or another, they've exited the business.
Second, the polarizing marketplace has made commercial Thoroughbred breeding more of a “high-risk, high-reward” endeavor than ever. Record averages have driven up stud fees, which then require the ensuing foals to meet or exceed those lofty initial price tags to cover costs or profit.
Because the target has gotten smaller to make money in the commercial market, much less pay off loans, Feenick said Farmers has concentrated on shorter-term loans over the past few years, and lending on smaller percentages of value to lower the risk of default by the borrower.
“Our parameters usually have been pretty much the industry standard that we'll lend up to 50 percent on value,” he said. “I'll tell you if I have anybody that's up near that right now, they'll probably come up short, come fall.
“I'm hoping that we've been vigilant enough in that area, and my clients have worked with me, that they should be able to come with Plans B and C, should the market come up with a significant change,” Feenick continued.
If the market were on an upward trend, and demand were still catching up with the supply, as it was in 2012 and 2013, Feenick said he would not be as concerned about the commercial breeding industry weathering a potential blow like COVID-19 and all of its complications. However, in a market already teetering on over-cost and overproduction, it might be tougher to find buyers at the price one hoped for beyond the chosen few.
Feenick said the long-term nature of the Thoroughbred breeding market means it'll be a slow ship to turn around, as it has been in the past.
“The market will always over-correct,” he said. “We can't correct the market in production and stud fee for another three years, no matter what happens in September. If the market starts to climb back up after that, the next couple crops are going to be cheaper and smaller. It will always over-correct because it has to predict three years out when it comes to breeding. If the market starts to climb up, production and cost are going to take a few years to catch up, and that's where we've been the last couple years – production and costs have caught up.”
No matter what happens this year, the next, or beyond, the market has always been cyclical by nature. Both Feenick and Costich said the operations that stick around are the ones that prepare themselves for the drought when it's raining.
“We've seen our share of sales toppers as well as disappointments, which helps us avoid overreacting to any one particular sale or year,” Costich said. “COVID-19 is simply one of those variables that no one saw coming. The solid operators figured out how to manage their unique set of circumstances and are making their way through it.”
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