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Big Picture Shows Yearling Market Holding Firm

If a tree falls in the forest and there's nobody there to hear it, does it still make a sound? We'll leave their old teaser to the philosophers, to debate whether noise still qualifies as “sound” if it doesn't reach anyone's ear. But for a long time now our own industry has been puzzling over a still more perplexing version: if a tree falls in the forest, or indeed if a war breaks out in Europe, or a pandemic sweeps the planet, or central banks have to douse the fires of inflation…. How does anyone ever know, if they're all at a horse sale?

Our trade has in recent years appeared mysteriously impervious to many of the economic dramas afflicting the outside world. In 2023, however, many keynote auctions have experienced what felt like an inevitable and possibly overdue moderation of the tempo. Nothing too dramatic, in the main: the kind of thing that might be described as a “correction,” often measuring up more than respectably to what had seemed extremely robust figures in 2021, prior to a notably giddy spike at the elite auctions last year. But those trends are internal: they are measured, year to year, in the same ring and in the same currency. Now that we can more or less close out the data on the 2023 yearling market, however, we're in a position to take a step back and assess its overall performance in the kind of transnational terms that match the perspective of its principal investors.

And, with only a couple of minor European sales still to be entered on the ledger, it turns out that the aggregate value of the yearling market either side of the Atlantic in 2023 has almost precisely matched even the historic landmark of last year. Then, for the first time, we were able to acclaim “Billion Dollar Babies.” This time round, the headline figure has inched up 0.3 percent from $1,001,529,828 to $1,004,465,043.

region	year	catalogued	Out	% out to cat	ring	sold	% sold to out	gross	average
All	2023	14649	1918	13.09	12731	10268	80.65	$1,004,465,043	$ 97,825
All	2022	14499	1825	12.58	12674	10559	83.31	$ 1,001,529,828	$ 94,851
All	2021	13546	1769	13.05	11777	9924	84.26	$ 937,533,161	$ 94,471
All	2020	13876	2336	16.83	11540	8876	76.91	$ 687,432,621	$ 77,448
All	2019	16055	2173	13.53	13882	10649	76.71	$ 905,622,360	$ 85,043

When you think of the huge spectrum of yearlings to come under the hammer from each crop, this virtual parity feels almost freakish, especially when so closely matched by the numbers entering the ring: 12,731 this year, compared with 12,674 in 2022. One of the few conspicuous wedges between the two years is a slippage in the clearance rate, from 83.3 percent to 80.7, translating into a 2.75 percent drop in overall sales to 10,268 from 10,559. Sure enough, then, the average cost of every yearling in the combined transatlantic market has actually advanced 3.1 percent to a new high of $97,825 from $94,851.

That headline positive duly contains a mild negative, in that the average achieved from essentially unchanged turnover goes up because there have been more RNAs. But the bottom line is that those that did change hands made more money than ever.

Nonetheless there are a couple of caveats to that statement. The most important is that the European element must always be assessed through the prism of fluctuating exchange rates. Last year, for instance, the dollar value of a soaring internal market in Europe actually weighed in 2.4 percent lighter than in 2021. This time round, European trade converted to $404,163,529, up 3.3 percent from $391,241,817, on the face of it a wholesome contrast with a marginal slip (1.6 percent) in the American gross from $610,288,011 to $600,301,513.

region	year	catalogued	Out	% out to cat	ring	sold	% sold to out	gross	average
EU	2023	6019	547	9.08	5472	4556	83.26	$404,163,529	$ 88,710
EU	2022	6295	589	9.35	5706	4845	84.91	$ 391,241,817	$ 80,752
EU	2021	5730	512	8.93	5218	4480	85.85	$400,981,400	$ 89,505
EU	2020	6219	765	12.3	5454	4357	79.88	$ 328,852,326	$ 75,477
EU	2019	6864	620	9.03	6244	4982	79.78	$ 391,396,347	$ 78,562

But much of that gain in European trade reflects the anaemic condition of sterling last year. During Book I at Tattersalls it traded at $1.13, and there had been little change by the time the global data was reported for a similar examination this time last year. By the start of the year, sterling had hauled its way up a few rungs to $1.21 and–following a mild midsummer swell–that's pretty well where it remains today. So while an American buying a Book I yearling this year might regard the extra cost of a “guinea” this time as no big deal, the difference was comfortably more than the increase in the dollar value of the European yearling market.

We're a still a long way from pre-Brexit values, however. In October 2015, sterling at $1.52 meant that the Book I average converted to almost exactly $355,000. This time round, when the local value of a Book I yearling was 9.7 percent higher than 2015, the dollar value remained 12.7 percent lower. Domestic vendors should not deceive themselves, then, that it is only the caliber of their stock that might have been tempting American investors since the great Brexit tantrum.

Of course, if you're trading within that market none of this will matter. A domestic pinhooker, or a breeder who pays a local stallion fee, will be paying electricity bills and wages in the same currency. Within that trading environment, in Europe, a few factors together conspired to take some of the heat out of the market compared with 2022: just one of the final crop of yearlings by Galileo (Ire) surfaced in Book I, for instance, even as his premier son Frankel (GB) becomes increasingly the resort of top breed-to-race programs. (And then there was the fact that one of the biggest contributors to turnover in 2023 never actually paid up!)

As for the American market, perhaps the key indicator is the decline in clearance to 78.7 percent sold, from those entering the ring, down from 82 percent last year and 83 percent in 2021. We've already noted the impact on the overall figures, the European rate having held up a good deal better at 83.3 percent, after registering frantic demand (84.9 and 85.9 percent) over the two previous years. As a result, at $105,095, the average North American yearling transaction in 2023 fell only just short of last year's breakthrough figure, when the six-figure barrier was breached for the first time at $106,808. In other words, people appear to have been a little “pickier” in their shopping while being prepared to go harder at their final shortlist. A little tougher to sell, then; but a little tougher to get that hammer to fall, too. But don't forget that a clearance rate touching 79 percent is still way better than 74 percent in the year before the pandemic.

region	year	catalogued	Out	% out to cat	ring	sold	% sold to out	gross	average
NA	2023	8630	1371	15.88	7259	5712	78.68	$600,301,513	$ 105,095
NA	2022	8204	1236	15.06	6968	5714	82	$ 610,288,011	$106,806
NA	2021	7816	1257	16.08	6559	5444	83	$ 536,551,762	$ 98,558
NA	2020	7657	1571	20.51	6086	4519	74.25	$ 358,580,295	$ 79,349
NA	2019	9191	1553	16.89	7638	5667	74.19	$ 514,226,013	$ 90,740

One way or another, the market plainly remains robust. A mild loss of momentum in some indices feels somewhat overdue, if anything, a prolonged bull run having suggested bloodstock to be immune even to the most alarming economic and geopolitical tremors. But it may be that those whose affluence has been consolidated even through times of plague and war are not quite so indifferent to an altered fiscal landscape.

It was always contentious that the cash doping of panicked economies persisted so long after the banking crisis, but for a while now we've found ourselves back in a forgotten world of high interest rates. And central banks still aren't getting enough patches of blue sky to put away the umbrella. Meanwhile the S&P 500 is heading towards its third negative month in a row, which hasn't happened since the start of the pandemic in 2020. There's new instability in the Middle East, compounding the ongoing crisis in Ukraine, and a turbulent election year ahead. Those are some of the trees falling in the forest.

Our own world persists in its insularity, albeit without a great deal of coherence. Demand for racehorses can only be described as healthy, if the transatlantic yearling market can maintain the $1 billion breakthrough of last year. But supply continues to diminish, with a declining foal crop ever less eligible to service the betting windows and so, ultimately, purses. In the meantime, we have slot boomtowns even as storied venues are closing; extremes that make our sport's very survival bitterly contentious, including within our own community. Above all, we persist in placing the cart of commercial breeding in front of the horse itself. (We've just come within a couple of shifts of a totally unproven sire covering 300 mares!)

There remain many things we can be positive about, as we hope to be reminded at our principal showcase this weekend. But we can't take this resilience of investment, remarkable as it is, for granted. As and when it dries up, we need to be ready with a resilience of our own: with a breed, and a sport, equipped to last.

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This Side Up: Billion Dollar Babies are Here

It's a long time now, some 40 years or so, since Nelson Bunker Hunt's notorious observation that “a billion dollars isn't what it used to be”. Which presumably means that today it's no longer even quite what it was, back when it wasn't what it used to be. After all, we've just seen the dispersal of a single art collection–assembled by the late Paul Allen, co-founder of Microsoft–realize $1.5 billion. Nonetheless it feels as though the transatlantic yearling market, in 2022, has reached a pretty historic landmark in tipping 10 figures for the first time.

Though a couple of minor catalogues remain to be processed in Europe, the overall value of yearling trade in North America and Europe has already advanced $63,996,667 (6.8%) on the 2021 tally of $937,533,161 to smash a symbolic barrier at $1,001,529,828.

Even in a marketplace currently inuring us to records, with one auction after another achieving new high-water marks, it's pretty staggering to register a first-ever crop of “billion dollar babies”.

This figure, moreover, crushes very strong internal growth in the European market under the weight of a dollar that has been leaning heavily on other currencies in general, and sterling in particular.

That's perfectly valid, in that the upper tier of the European market is dominated by international rather than domestic investment. For those who count their wealth in dollars–the kind of people buying Mr. Allen's Klimts and Cezannes–the quaint old “guinea” has proved an especially congenial means of conducting business this year.

So while turnover and averages at Tattersalls and elsewhere have been soaring giddily, year on year, dollar conversion actually confines the value of the European market to a degree that would astonish its indigenous participants. In those terms, it has actually shed 2.4% this year, down to $391,241,817 from $400,981,400 in 2021. While we naturally pass over the COVID-warped turnover of 2020 (weighed in at $328,852,326), the European market this year was virtually identical to 2019, at the prevailing dollar rate, and down 4.8% on $410,789,647 in 2018. That's a chastening correction of perspective, for any Europeans attributing a booming export market to the sheer quality of their product.

Consider Europe's premier yearling catalogue through the prism of a fluctuating exchange rate. In October 2014, when £1 would get you $1.59, the average Book I yearling at Tattersalls realized $393,893. After the Brexit referendum in 2016, sterling having slumped to $1.22, the same book averaged $292,168. And this year, with sterling bumping along the floor at $1.12, a “record” average for the sale converted to just $280,080. So while the average guinea cost of a Book I yearling has gained 26.6% since 2014, the average dollar cost has meanwhile come down by 28.9%. (Jolly well done, Brexit supporters!)

Of course, the pinhooker who buys and sells within the European market, or the breeder who pays a covering fee there, will also buy their bread and milk in the same currency. So their sense that business is booming is perfectly legitimate, and its suppression within these figures–unprecedented as they are–only goes to show how remarkably potent is the current bull run in international bloodstock.

The flattening of European growth by dollar conversion leaves the average cost of a 2022 yearling, either side of the Atlantic, virtually unchanged at $94,851. In North America, however, we have reached a landmark every bit as stunning as the $1-billion overall market. In 2022, the average American yearling broke six figures, up from $98,558 last year to $106,806.

Once again, then, we renew our perplexity about this market's peculiar immunity to rampant geopolitical and economic maladies out there in the real world. We know that its most affluent contributors were never asked to furl the cash umbrellas they were issued after the banking crisis, and many have now separated themselves altogether from the exposure being experienced by the rest of society. Yet after a decade of spending stimulus, interest rates have finally been dusted off to tackle such forgotten inflationary horrors as plague and invasion. And somehow this market is still humming along.

The demand is real. Forget aggregate turnover, look at the astounding clearance rate. This has historically been less robust in America, but whereas 75% of those entering the ring here in 2018 found a new home–and that was a better clip than in the three preceding years–in the last two years the tally has climbed to 83 and 82% respectively. In Europe, similarly, the 2018 clearance of 78% has been moved up to as high as 86 and 85%.

Fasig-Tipton photo

So how does this all hold together? The stallion farms certainly appear to be taking their cue. Some of their fees for next spring arguably (and understandably) claim a piece of the action. Several elite stallions are getting steep hikes, on both sides of the water, in some cases at a time of life when their quality has been long established. But the organic connection between yearling values and covering fees entitles farm accountants to seize the day.

Over the past week, moreover, we have also seen how some unusually glamorous new stallions are stimulating demand for the most eligible mares. And while the gentleman who gave $4.6 million for 2.5% of Flightline can comfort himself that the underbidders set standards in the astute calculation of bloodstock values, this horse has reminded us–despite the notorious brevity of his first career–of the economic potential of sheer fan power.

That's significant, because for now there's limited crossover between those spending at Keeneland this week, and those spending in the same ring back in September. It's heartening that so many people want to buy racehorses; and especially that many are doing so because viability on the track, in some parts of the country, feels increasingly feasible. But the circle still needs to be completed. If demand is so high, then why is supply diminishing? Why is the North American foal crop still to revive after its post-2008 collapse?

After the banking crisis, we soaked up four consecutive crop drops between 5.9 % and 12.7%. There followed three years of stability before numbers began to ebb again, down 4.4% in 2018 even as the market was booming. Obviously we've since had a big COVID-shaped punch to the belly, but the projected crop for 2023 is again down.

As we know, the racing program–notably its black-type tier–has not sufficiently matched that contraction to remain competitive, and therefore stimulating to handicappers. The legal wagering menu is expanding all the time, and our own demographic is ageing.

Demand is high, but foal crops are decreasing | Eclipse Sportswire

It is true that crop sizes little different from today (c.18,000) serviced the American sport adequately in the era when it still retained a mass following. And the huge leap in the Thoroughbred population actually came after that heyday, from the mid-1960s to the mid-1980s, instead being driven by a revolution in the commercial breeding environment.

In this latest cycle of demand, however, we see no corresponding rise in supply. We've had a bull run for several years now, even riding out the pandemic with surprising resilience, yet the foal crop has meanwhile stagnated at best.

Doubtless there are many different reasons for that. But one big difference between now and the couple of decades leading to the peak of 1986 (over North American 50,000 foals) is the failure of the export market. Those years of revolution owed significant impetus to European stables. (And rightly so, as things turned out: the result was a game-changing regeneration of the European Thoroughbred.)

Now I'm not going bother with an umpteenth rebuke for the disastrous modern schism between the two gene pools, and therefore the two markets. Nowadays, after all, I consider that more of an opportunity than a problem: if I'm right, then those who share my views will cash in; and if I'm wrong, then there's no need to gnash any teeth.

Nonetheless one or two collective responsibilities do need to be embraced. How, for instance, to retrieve that European faith? Many of the prejudices that have stifled investment are actually thoroughly misguided. Nonetheless reconciliation could be a valuable incidental benefit from the earnest embrace of HISA.

In the domestic market, meanwhile, how do we excite all these people buying racehorses with the idea of breeding them? As things stand, this buoyancy at the sales ring does not yet fit any coherently virtuous circle of engagement.

You couldn't say that Californian racing is thriving simply because it has produced nearly all the recent champions most likely to engage new fans: Zenyatta, California Chrome, American Pharoah, Justify, Flightline. Yet while other local barometers remain dispiriting, notably purses and fields, at least its leaders have made the tough decisions necessary to secure a more sustainable footing for any other progress that can be made. They have started from the ground up, literally, with their racing surfaces–and have done such a good job that they might yet prove able to turn round some of their other issues.

By the same token, just because horsemen elsewhere are making plenty of dough, whether in the ring or on the track, that doesn't mean they can be complacent that everything else is in place. For a time, remember, the price of silver told Bunker Hunt that he had just about nailed his attempt to corner the market. Let's be cautious, then, before deciding that all the glister on our Thoroughbreds must be gold.

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Sales Resilient, But Overall Profitability Suffers Amid Pandemic

In March and April, the bloodstock sales world stood on the precipice, or so it seemed, as the Inglis Easter Yearling Sale–the first major international auction to confront the social upheaval of COVID-19–was put under severe pressure. In the event, team Inglis rose to the challenge and showed a potential way forward for other sales houses with its innovative virtual sale. It didn’t, however, escape completely unscathed, and trepidation remained high for those with horses to sell all over the Northern Hemisphere.

Six months on, we can now report that the sales went ahead–not all in their chosen venues and dates and not all with their original lineups–but horses were sold nonetheless, cash flowed so that bills will get paid and future investment funds will be found.

Remarkably, Europe’s five big yearling auctions–Arqana, Doncaster Premier, Goffs Orby and Tatts Books 1 and 2–ended up with an average price just over 14% behind where it was 12 months ago. In essence, prices in 2020 are still ahead of where they were as recently as 2015. It’s a truly miraculous turn of events considering what we thought we faced six months ago.

It wasn’t good news for everyone, though. Confidence didn’t really return until Tattersalls staged their annual yearling sale during the first two full weeks in October. By then, both the Goffs Orby and Doncaster Premier Sales–shorn of some of their big investors and with the distinct disadvantage of having to change venue and open the calendar, respectively–had suffered sizeable setbacks, their averages shrinking by 35% and 27% respectively, while their clearance rates fell by about five percentage points. And although Arqana didn’t suffer quite so badly–its average 11% shy of last year’s figure–it was really Tattersalls that saved the 2020 European yearling market. Its Book 1 provided a gloss at the elite end, but it was Book 2 that really led the recovery that spilled over into Book 3.

Tattersall Book 1 was the place to sell if your yearling was among the top 45 to 50 at the sale. For this group, the average was down only 3%, but for the next two sets of 45-50 yearlings the average fell away markedly by 19% and 25%, respectively. In fact, it was so tough lower down the order at Book 1 that there will be plenty who wished their yearling had been in Book 2. For starters, Book 2 recorded a higher clearance rate–85.3% to 84.9%–than last year. Then there’s the fact that its top three deciles (225 yearlings) were down by only 4%, 1% and 6%, respectively. And for the rest of the sale, reversals in average were for the most part kept below 10% giving Book 2 an overall average just 3% behind last year’s sale.

But we cannot just talk about the elite market. So many commercial yearlings are produced these days that many spill over into other less lucrative auctions. It is interesting to note for instance that in a normal year 76% of all yearlings sold by sub-20k stallions in Europe are auctioned outside the five main sales. Even the 20k-plus stallions have significant numbers (31%) of their yearlings sold at the non-elite sales. No one yet knows what the final implications for the yearling and nominations market will be. It looks like we will have to wait until January before we get a complete and accurate sales picture.

Even before COVID-19 arrived on the scene, there was pressure on profitability building within the European yearling market. It’s not that stallion studs have individually been hiking fees recently; it’s the fact that the number of high-priced stallions on European rosters in the past six years is at an all-time high. Ten years ago only 13 of the top 30 stallions in Britain and Ireland assessed by book quality stood at £20,000/€20,000 or more. By 2019 that number had risen to 22 out of 30. The cheapest fee of the top 30 stallions in 2009 was £15,000 and by 2019 it had risen to £30,000.

To illustrate the point, we can use the elite European Sales. In 2018, 2,111 yearlings were sold at these five sales and 67% made enough to cover their sire’s advertised fee, plus £20,000 in production costs. A year later, the 2,133 yearlings sold included 65% that were profitable by the same criteria – down two percentage points. This year, whilst it is excellent news that as many as 1,973 found new homes from the five sales, the margins were squeezed so much that only 58% cleared the advertised-fee-plus-£20k hurdle. We can, of course, lay most of the blame for this seven-point drop on the COVID-19 disruption, but there’s a good chance that the number would have been down anyway.

There have been precious few silver linings to the COVID-19 cloud. For the bloodstock industry, it will surely hasten a fundamental review of the supply and demand of commercial young stock over the next few years, with implications for everyone in connected markets.

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