Cost-Cutting for
Commercial Breeders
With the rapid rise in North American stud fees and other forms of overhead expenses in recent years, healthy profit margins within the commercial sector of the thoroughbred industry are becoming harder and harder to come by. Investors have resolved themselves to the fact that many of their investments will yield a loss upon re-sale, and that one or two home runs will be required to save the bottom line.
When industry analysts discuss the economic dynamics within the commercial 
breeding industry, it is usually done in terms of the larger numbers. And while these numbers are the biggest pieces of the pie, there are other methods for cost-cutting that can add thousands of dollars to the year end numbers of a
commercial breeding program.
"For some, the reluctance to analyze certain operational costs stems from a paradigm within the industry where certain costs are fixed and questioning them is a breach of etiquette."
Though many bloodstock investors have been able to implement effective cost-cutting methods in the corporate world, few spend the time to develop and implement similar methods into their thoroughbred investment portfolio. For some, the reluctance to analyze certain operational costs stems from a paradigm within the industry where certain costs are fixed and questioning them is a breach of etiquette. But for those investors who don’t enter the industry with large amounts of capital, failure to devise effective cost controls is more than a breach of etiquette. It can be a first class ticket out of the industry altogether.
This week, we’ll look at ways for commercial breeders to potentially reduce costs and increase their bottom line. Not all of these methods are viable for all breeders, but they should at least be explored as part of an overall analysis of their program.
Creative stallion service terms - While most syndicates with commercially viable stallions are increasingly reluctant to engage in creative deals such as foal sharing and/or those where the negotiated fee is payable from the proceeds of the sale, it should at least be proposed by the mare owner in the event that a shareholder is willing to entertain the idea. As they always say, it never hurts to ask. Both scenarios are great ways for investors to climb the tiers of the commercial market without risking the entire operation. This is where developing relationships within the industry is so crucial. For the isolated investor with few contacts, it can be very difficult to get in touch with individuals who work on creative terms.
Negotiating through an agent - Even for those investors who have a disdain for bloodstock agents, one shouldn’t overlook the possibility that an agent has other clients sending mares to the same stallion and a package deal may be possible. Most successful agents have working relationships with syndicates that often translate into more favorable terms, even in cases involving just one mare.
Also, good agents have spent time identifying soft spots in the stallion markets, where low demand for a particular sire may present a good investment opportunity. Investors would be wise to at least inquire with a reputable agent to find out if opportunities exist.
Booking fees - In a marketplace where most finished products are sold at a loss, commercial investors need to take a hard look at booking fees and how they effect the year end numbers. Booking fees are becoming less and less common in the east, but we still see them from time to time. Stallion syndicates argue that they are used to commit mare owners and keep them from stockpiling contracts. By collecting booking fees, stallion syndicates are essentially converting 10-25% of your live foal season to a no-guarantee season and creating a significant amount of guaranteed income each year. With the growing competition among stallion owners to attract mares each year, investors and their agents should insist that booking fees be done away with altogether, or at the very least, refunded if the mare owner presents the mare for breeding, but fails to get a live foal.
Auction reserves - This is one phenomenon in the auction environment that is difficult to understand. With sales companies collecting a commission regardless of whether the horse sells or not, it doesn’t make sense to authorize them to run the bidding up to a certain amount, thereby guaranteeing an amount that is potentially more than if it were left to the open market.
For example, if a reserve of $100,000 is set, the sales company and consignor are guaranteed their respective percentages from that amount. But if market demand is only $60,000, the owner will benefit from protecting his or her investment by bidding themselves. In this scenario, the owner could save as much as $4,000 in unnecessary commissions by not setting a formal reserve with the sales company. Over the course of a year, where several individuals are being offered at public auction, these unnecessary commissions can add up quickly.
Sales prepping - For those commercial breeders with their own farm, much of the sales prepping process can be started at their own facility. Despite this, many are convinced they need to send their bloodstock off to sales prep specialists who charge much more than what it would cost to do the sales prepping at home.
The key here is to be honest about what you can and cannot do at your own facility. Overestimating could lead to an inadequately prepared product, while underestimating can lead to unnecessary expense. In most cases, investors are better off to send their bloodstock to sales prep specialists, but it should always be evaluated thoughtfully.
Claiming mares - This is perhaps the best way for reducing initial investment expenses. Young, well-bred fillies are increasingly becoming one of the hottest commodities in the auction ring with prices reaching levels well out of most of our price ranges. This has led to an entire pinhooking market where fillies are being claimed off the track and sent directly to the breeding stock sales. Mares being claimed for $5,000 and re-sold in one of the breeding stock sales for $25,000 plus is not uncommon.
While the convenience of having hundreds of broodmare prospects together in one venue is appealing, many commercial programs could benefit by monitoring the claiming ranks and cutting out the middle man. Successfully claiming fillies for prices below auction value can add several thousand dollars to a program’s year end numbers.
Overpaying for older mares - Conversely, the marketplace is becoming increasingly biased against older mares, even those with proven produce records. Just as in the stallion markets, where breeders clamor towards the idea of ‘what might be’ (i.e. 1st and 2nd year sires) rather than ‘what is’ (i.e. older, proven sires), the same phenomenon seems to be at work with broodmares. Even in cases where the mare has produced one or two stakes horses and several useful winners, the market will often put a higher premium on young, well-bred mares with essentially blank resumes.
Conflicts of interest - This is another good example of how keen business types often throw good business sense out the window when they enter the thoroughbred industry. All good business models stress the importance of avoiding conflicts of interest, and investing in thoroughbreds shouldn’t be any different. Owners need to make themselves aware of any potential conflicts of interest, such as advisors getting commissions from consignors and stallion syndicates for sending the bloodstock investor’s business their way. Such compensation may produce advice that is more beneficial to the advisor than the bloodstock investor. An obvious example is relying on stallion managers for advice on stallion selection. Bloodstock investors are always wise to bring in an outside advisor to provide feedback that is not a function of outside financial gain.
In an industry where a healthy bottom line is often times elusive, bloodstock investors should always be examining different aspects of their program for ways to improve their chances for long term success. This is not to say that cost-cutting in all forms will benefit a program, as many efforts to reduce overhead can prove costly in the long term. A careful balance must be struck where all forms of spending are geared towards turning a profit and maintaining a productive business model.
