Understanding ‘Value’ in Stud Fees
Language concerning the concept of value is used freely and loosely throughout our society. Usually, such language is, at best, ambiguous, and rarely does it delve into the specifics of what defines ‘value’. From automobiles to mutual funds, everyone claims to be selling something with extraordinary value, although few bother to substantiate such claims.
These days the same semantics are working overtime n the breeding industry, especially in relation to stallion markets. Industry periodicals are littered with advertising claiming a particular tallion offers mare owners extraordinary ‘value’ and a ‘higher return on investment.’ Citing sales numbers and a myriad of statistics, stallion syndicates spend a lot of money trying to persuade us that there is money to be made if only we’d send our mares to their stallions.
“For the typical mare owner aiming for the sales ring who invests $10,000 into a stud fee, the absolute minimum threshold for profit is $26,610, after commissions are paid to the consignor and the sales company.”
So what exactly constitutes value in the breeding industry? And who defines it? Owners and trainers may define it in terms of winning percentages or opportunities at developing a stakes-quality runner. Commercial breeders are more likely to define value as a function of the rate of return on investment, although some of them may disagree on the specifics. As to who defines value, too often that’s left to claims in stallion ads, when it could be better ascertained through a careful fiscal analysis by mare owners
|Fees||Breeding to Sell||Breeding to Race|
|Mare Depreciation (15%)||$5,250||$5,250|
|Board (through Sept. of yrlg year)||$9,360||$9,360|
|Vet, farrier, insurance, etc.||$2,000||$3,000|
Another ambiguous element involves statistical interpretation. Because most advertising utilizes averages that are subject to skewing by one or two exceptional progeny, it’s often wise to use numbers that show the performance of progeny in the mid and lower levels. But regardless of the context or the statistics involved, it is safe to assume that even in the loosest terms, value needs to create a scenario in which investors break even. We can’t even begin a discussion of what constitutes value if investors are losing money.
The number of stallion ads purporting to offer value is somewhat surprising considering that three out of every four yearlings who passed through U.S. sales rings last year generted a loss for their breeders. Increasingly, breeders are becoming reliant on the big horse to carry the program and save the farm. No doubt many of those unprofitable yearlings from 2005 were the result of ill-advised matings and other poor decisions on the part of mare owners who prefer to blame stallion syndicates for their misfortune rather than examining the big picture.
Regardless of how much others are responsible for disappoiting sales numbers, stallion syndicates often claim that the net results (sales and track averages) represent value to breeders relative to a stallion’s stud fee. As the rise in such fees continue to outpace the rise in auction prices in the middle and lower markets, it might be wise to disect all costs associated with production in order to obtain a better understanding of how much value is really being offered in the American stallion markets. This is where it becomes necessary to sharpen pencils and introduce a proper interpretation of industry statistics to the discussion.
The most noticeable omissions in stallion advertising are the commissions paid to consignors and sales companies, which typically total a cobined 10 percent. For example, if a stallion’s connections are using a yearling average of $80,000 as a selling point, astute investors should instantly deduct 10 percent – or $8,000 – before moving on to other criteria for determining value.
Another significant cost of production that is seldom factored into alleged rates of return is mare depreciation. In the case of a $20,000 stud fee, typical mare values hover in the $60,000 to $80,000 price range, based on the common practice of spending 25 to 35 percent of the mare’s value on a stallion season. Assuming a 15 percent annual mare depreciation (most industry experts calculate mare depreciation at 25 percent annually, with many mares failing long-term and subsequently having minimal value after four years; but to err on the side of stallion syndicates, we’ll use a conservative 15 percent), breeders in the above scenario will ‘spend’ an average of $10,500 on mare depreciation.
Then there’s the cost of maintaining a mare and her foal. Though rates vary from region to region, even the most modest day rate can add up over the 11 months of gestation and the 15 to 20 months between foaling and the yearling sales. We’ll assume an average day rate of $12, a figure well below what many farms now charge. At this rate – a number that doesn’t even accommodate the higher costs of sales prepping – mare owners can expect a minimum outlay of $9,360 in boarding expenses.
Finally, there are a slew of miscellaneous costs that, while difficult to predict accurately, mare owners must still take into account. Insurance, veterinary and farrier costs can run into the thousands of dollars; for argument’s sake, we’ll remain conservative and use a figure of $2,000.
And for those breeding to race, the numbers become even more discouraging. From conception to a horse’s first race (assuming the foal even makes it to the races – 30 percent of all foals never compete), a breeder is looking at all the costs mentioned above (with the exception of sales commissions), plus the cost of breaking and training. At a minimum of $30 per day for breaking and $50 per day for training – both figures falling well below those common on larger farms – those breeders sticking with their investment all the way to the track can anticipate spending an additional $7,800, based on 60 days of breaking and 120 days of training. These numbers assume a best-case scenario in which no injuries occur and the foal makes it to the races relatively early in his juvenile season. As many people involved in breeding are painfully aware, the vast majority of foals experience problems of one sort or another. And while breeders who race don’t have to shell out the combined 10 percent commission at sale time, they are responsible for a 20 percent hit when purse money kicks in – 10 percent each to trainer and jockey – in addition the trainer’s day rate.
Now that we’ve established and itemized some of the costs of production, albeit with conservative estimates that favor the claims being made by stallion syndicates, we can plug them into equations involving different stud fees and determine what kind of gross return is necessary before claims of good value can be asserted.
As an example, let’s take a look at a hypothetical situation involving a stallion with a $10,000 fee.
The accompanying table illustrates the minimum thresholds that must be attained before breeders can even begin to discuss profitability and value. For the typical mare owner aiming for the sales ring who invests $10,000 into a stud fee, the absolute minimum threshold for profit is $26,610, after commissions are paid to the consignor and the sales company. The task is even more daunting for those breeding to race, as they need to net $35,410 before thoughts of profit can be entertained.
Mare owners would be wise to scrutinize these numbers in order to determine a stallion’s true ‘value’, rather than basing a program’s future on the claims being made by stallion syndicate advertising.