SPARKMAN: The Invisible Hand

The father of modern economics, Adam Smith, introduced the metaphor of the invisible hand of the market in his seminal book “The Wealth of Nations” in 1776. Smith’s metaphor for what he conceived as a natural, self-regulating function of a free market is readily visible in the accompanying table detailing the sharp decline in the number of Thoroughbred stallions and mares in North America over the last 20 years and the accompanying fluctuations in stud fees over the most recent decade.

Metaphors are one of our most useful literary inventions, but they tend to become corrupted over time, and whether the changes visible in stud fees are due to factors that can be described as purely “the market” perhaps depends on one’s definition of the market. The marketplace for Thoroughbred stallion seasons of 2014 is governed by Smith’s invisible hand, for sure, but it also is highly dependent on the invisible – to the public – hands of veterinarians sheathed in rubber gloves.

[View breeding data accompanying this story]

Since 1993, according to The Jockey Club’s annual Report of Mares Bred, the number of mares bred in the United States has declined from 56,267 to 33,714 last year, a 40 percent reduction in the number of Thoroughbred broodmares in production. The decline from the temporary peak of 58,693 mares bred at the end of the most recent bloodstock-market bubble in 2008 is even more dramatic – 43 percent.

Over that same period, however, the number of stallions listed in service in The Jockey Club report has plummeted from 5,802 to 1,821, an even more dramatic 69 percent drop. The reason for the sharper decline in the number of stallions available to cover mares is evident in the column entitled “mares per stallion.” The average number of mares bred to an individual stallion has almost doubled over those same two decades.

As anyone who has been active in the Thoroughbred business for at least 20 years knows, the most important trend in the industry over the past two decades has been the enormous change in the number of mares covered in a single season by popular stallions, especially at the big Kentucky commercial stallion stations.

The major factor on which that trend depends, though, illustrates why markets are not the closed systems we sometimes pretend they are. In the 1980s, advances in veterinary techniques made it possible for veterinarians to predict more accurately when a given broodmare would be at her most fertile, and a few stud farms, notably Ben Walden’s Vinery Stud and the Coolmore-owned Ashford Stud, were quick to take advantage of those techniques to expand the number of mares covered by their stallions.

That change was just becoming widespread in 1993 and was viewed as revolutionary at the time, but in truth, it was just the next step in an existing trend of increasing the size of stallion books. For most of the first 200 years of the Thoroughbred’s existence, stallions, even great ones, covered the mares owned by the stallion’s owner and perhaps a few owned by his neighbors and relatives. Sending mares any appreciable distance to be covered by a stallion was impractical because there was no way to get the mare there besides walking.

The advent of widespread rail travel and horse-drawn horse boxes (the forerunner of the modern horse trailer) in the mid-19th century made it possible for mares to travel greater distances to be covered by a popular stallion. But at the same time, the great stud farms began to be concentrated more and more in a few locations like Newmarket and Yorkshire in England and the Bluegrass area of Kentucky. Both led to somewhat larger numbers of mares to be bred to great stallions of the second half of the 19th century like Stockwell and St. Simon in England or Lexington in the United States.

The advent of the stallion syndicate in the 1920s was the next step in the process of expanding stallion books. Early stallion syndicates usually consisted of only four or five major breeders owning large percentages of the stallion, but as the breeding industry grew, so did the number of shareholders in a syndicate.

By the 1950s, when Leslie Combs II or Arthur B. Hancock Jr. were syndicating just about every top racehorse who came off the track, the number of shares in a syndicate had solidified between 32 and 40 shares, with books usually restricted to one mare per share, plus a few breeding rights for the syndicate manager.

Bold Ruler, the greatest American stallion of the 1960s, and Northern Dancer, the greatest of the 1970s and 1980s, each sired an average of 28 foals per crop. Northern Dancer was famously never bred to more than 36 mares in a single year, but during the latter half of his long stud career, the numbers bred to other stallions began to climb as stallion owners realized that their chief moneymaking assets were being underutilized.

Even before veterinary palpation of mares led to midnight breeding sessions, the number of mares bred to some popular stallions had climbed into the 50s and 60s as stallion managers learned that what would once have been viewed as overusage did no harm to the physical well-being of stallions.

Over the last 20 years, breeding stallions, particularly young, unproven stallions, to 100 or more mares has come to be viewed as an absolute necessity for survival. Ashford’s success in popularizing young stallions through large numbers of runners on the track essentially forced other farms to follow suit. The result is the huge decline in the number of stallions and the dramatic increase in the average number of mares bred to individual stallions over the last 20 years.

The numbers in the accompanying table for Kentucky, the center of the American commercial breeding industry, are the prime driver of the numbers for the country as a whole. As the numbers show, the industry has become far more concentrated in Kentucky in the last two decades.

In 1993, the 14,152 mares bred in Kentucky amounted to 25 percent of the national total, but the 15,782 Kentucky mares bred in 2013 is 47 percent of the total number bred nationwide. By contrast, the 412 stallions listed in Kentucky in 1993 was 7 percent of the national total, while the 244 listed in 2013 is 13 percent of the total. In other words, stallions standing outside Kentucky rarely attract the three-figure books that are necessary for survival in the Bluegrass State.

All of these changes in the marketplace over the last 20 years are, at least to some degree, independent of changes in actual stud fees. Stud-fee data are not available in our files for 1993 and 1998, but the 2003 figures represent about the midpoint of the steady rise in bloodstock values that took off in 1995 and did not really end until the global economic crisis struck during the second half of 2008.

Thus, the 2008 figures represent the market at something very close to its most expensive moment in history. The 29 percent drop in average Kentucky stud fee from 2008 to 2013 is actually a reflection of factors outside the Thoroughbred market itself, namely the global financial retrenchment necessitated by the banking meltdown of 2008.

There is no doubt at all, at least in the minds of commercial breeders, that the 29 percent drop in average Kentucky stud fee was a very good thing for the market. The huge drop in bloodstock values from 2009-11 meant that commercial breeders were losing money on most of the horses they sold during those years, even those who sold for comparatively good prices, because they represented stud fees bought at the top of the market.

Selling horses in 2012 and 2013 produced from the lower stud fees forced by the market crash gave breeders at least a fighting chance to occasionally make money as the market improved.

Their biggest worry now is that stud fees will again rise too fast and too high. There is at least some evidence of that occurring in the fifth and 10th columns of our table, but the vagaries of data collection muddy the waters somewhat. Not all stallion managers who report covers for their stallions also report stud fees, a fact illustrated by the difference in the numbers of stallions reported by The Jockey Club in columns 3 and 8, and the number of stud fees reported in parentheses in columns five and 10.

Thus, the more than 50 percent jump in nationwide average stud fee for 2014 compared with 2013 is almost certainly wildly inaccurate. Compared with 2013 numbers, almost 500 stud fees, doubtless most of them in the lower echelons, have not yet been reported for 2014, skewing the comparative average fee considerably.

Not surprisingly, however, the number of stud fees reported for Kentucky for 2014 looks much more complete. Thus, the 12 percent increase in average stud fee listed for Kentucky is probably a pretty true reflection of the facts on the ground. Even after a year when the average yearling price rose 14 percent, that has to be a worrying trend for commercial breeders.

Adam Smith’s invisible hand of the marketplace works best when it is indeed invisible. A 12 percent increase in stud fees in one year makes the self-regulating properties of the market all too visible for comfort.