Trouble looms as supply outstrips demand again

Overproduction: drop in demand has coincided with a larger foal crop

PICTURE: Edward Whitaker ( Trouble looms as supply outstrips demand again
By Martin Stevens 1:14PM 25 OCT 2016

A special report into the issue of overproduction within the thoroughbred population

What is the problem?

A key measure of the health of the bloodstock market is the clearance rate – the percentage of lots in an auction that find a buyer. In an ideal world, 100 per cent of those on offer would change hands for big profits; but that is rarely the case, as vendors set reserves on their horses and will take them back home if the value is not met in the ring. Vendors are also able to bid on their own stock and can end up 'buying a horse in' if other bidders don't reach what is deemed to be a fair price.

Clearance rates have been the talk of this year's British and Irish Flat yearling sales season, which kicked off in Doncaster in August with the Goffs UK Premier and Silver sales, continued over the Irish Sea at Goffs and Tattersalls Ireland, and reached its climax this month with £140 million spent on horseflesh at Tattersalls in Newmarket during the October Yearling Sales.

At all those auctions since August, 3,263 yearlings have been recorded as sold for an overall clearance rate of 79 per cent. At the same stage last year, 3,239 had found new homes for a figure of 84 per cent.

On the face of it, a drop in clearance rate of just five percentage points year-on-year does not sound very dramatic. But – and here is the crux of the problem the breeding industry is facing – the drop in demand has coincided with a larger crop of yearlings coming on to the market.

In 2015 the foal crop in Ireland (including those destined for a National Hunt career) grew by around ten per cent from the year before to 8,780, while in Britain numbers increased by around six per cent to 4,569. The number of those foals who went to the sales as yearlings this year rose by seven per cent to 4,130.

So there is lower buyer demand but increased supply; hence we can safely say we are in a period of overproduction.

Some might say the number of foals being produced is correct in the context of what is needed to cater for enlarged fixture lists that comprise competitive races. But unless there are enough owners to buy all the horses being produced and pay for their upkeep, the argument is academic.

The smoking gun of overproduction is the tally of 867 lots who have been recorded as unsold at this stage of the British and Irish yearling sales season. The figure this time last year stood at 614, while between 2012 and 2014 it was never more than 561.

Eight-hundred-and-sixty-seven horses with an uncertain future. To put that in perspective, that is more than were offered this month in numerically the largest British or Irish yearling sale, Tattersalls October Book 2.

How has it happened?

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Bloodstock auctions are liable to operate on a boom-and-bust basis because of the time lag between the decision being made to breed a racehorse and the resultant foal being offered to market.

A breeder might be encouraged by a strong set of foal and yearling auctions in one autumn to send their mare to a stallion at the start of the following year, but the foal won't be born until around 11 months later and it won't go under the hammer until two years after those buoyant sales that first inspired vendor confidence in the case of a foal, or three years later for a yearling.

Problems arise when a wave of market confidence causes an increase in foal production but buyer demand stagnates, as has happened this year and last. Plus, of course, a lot can happen within the bloodstock industry and the wider economy in those two or three years of production, as was the case in 2008 when worldwide recession followed a boom in bloodstock prices. The bottom fell out of the bloodstock market in the aftermath and one notorious nadir was the now defunct Goffs December Flat Sale of 2008, when just 38 of the 167 lots on offer – a woeful 23 per cent – were sold.

Farms went out of business, livelihoods were lost and, the harsh reality should not be ignored, many horses were removed from the population, not necessarily to live out a blissful retirement in verdant paddocks.

It should be stressed that the current spell of overproduction is nowhere near as dire as that, as last year the Irish foal crop stood at 8,780, still a long way short of the 12,500 or so who were born in the country in 2007 and 2008. British breeders have shown more restraint, with the foal crop having stabilised at around 4,500 from a mid-noughties high of around 6,000.

The increase in foal production in the last few years has its roots in the last recession. As breeders who had had their fingers burnt stopped breeding, supply and demand became more aligned, and with new players from Qatar entering the market and hitting the headlines by spending record sums on yearlings, there followed several years of generally positive results for breeders at auctions.

But, as night follows day, so boom inevitably leads to bust in the bloodstock industry. Breeders were enticed to produce again, but the pool of end users for their foals failed to grow in line. Now we also have a jittery world economy once again, with uncertainty caused by Brexit and elections due in the US, France and Germany in the coming year.

Another issue is that, as production increases, so the number of lower-quality mares bred from goes up. End users can never have enough of a foal out of a Group 1 winner or closely related to one, but when they are spoilt for choice in a period of overproduction a poor pedigree can be easily disregarded when leafing through a catalogue.

What can be done?

We live in a free market economy and if commercial breeders decide to increase the number of foals they produce, there are no rules to say they cannot.

Similarly, many commentators would like to see a restriction in the number of mares one stallion can cover, a move that stud farms claim would be a restriction on their trade.

The most likely and yet least perfect scenario is that commercial breeders will take the financial hit of selling their foals at below production costs or not being able to sell them at all and refrain from breeding from those mares the market has judged to be unfit mothers.

But recent history shows that when in the future supply falls back in line with demand and prices in the lower rungs of trade recover, breeders could be tempted to take mares out of retirement or find new mares to breed from. In a boom-and-bust economy the problem is not solved but kicked further down the road.

Mind you, for all we talk about lower-quality mares and unattractive pedigrees, it is easy to forget that the market is not always the most reliable arbiter of who or who should not have been bred. The horses who have been 'overproduced' are not always easy to identify; take, for example, this season's unbeaten Firth of Clyde Stakes winner Delectation – she was bought back by her vendor for just 3,000gns when offered in Book 4 of last year's Tatersalls October Yearling Sale.

Then there was the breeder of a Cheltenham Grade 1 winner in recent seasons we interviewed in the wake of their notable success. What young progeny did the mare have, we asked. The answer was none because she had been culled in the last recession as her first foals, including the festival hero, had sold for pittances at auction.

If supply to the sales is unlikely to decline until next year or later, there is a pressing need to stimulate demand, especially at the base that supports the pyramid of racing. Another message from this season's yearling sales is that the upper echelons of trade are in robust health, as nine lots who sold for one million guineas or more at Tattersalls this month helped demonstrate. Big-money buyers, it appears, are already well incentivised to invest in bluebloods, with huge prize-money lavished on the major racing festivals and the riches available for producing stallions.

Perhaps now is the time to make ownership of a winning low-grade handicapper a little more financially rewarding so that those owners who go to the sales with a small amount they still cannot afford to lose have some hope of at least recouping their outlay and re-investing.

A growth in ownership syndicates to spread the cost of horses among more people would also be a welcome development for bringing new faces into the game.

Whether it is increasing prize-money, redistributing rewards further down the food chain or innovating ways to attract new owners, urgent action is required to find buyers for those 867 yearlings unsold at Flat auctions this year – a number that is set to increase with less prestigious sales still to come – not to mention those young members of the jumps population who have failed to find new homes this year and last.

Otherwise racing could find itself sleepwalking into a welfare crisis.

    Read More at Racing Post Bloodstock

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