Even if auction results heralded record returns over the past half-decade, it would be hard to find someone to proclaim that the current thoroughbred commercial market is the same one that has peaked. dizzying 1980s, even mid-1980s. 2000s.
One of the clearest indicators of this fact is how much the amount of money currently spent on horse loans has decreased, as well as the number of banks offering them. Although the market has recovered its way from the crash of the late 2000s, the fact that only a small handful of banks remain offering horse loans suggests that this segment of the market has not filled up. as much as it seems.
“Equine loans are definitely down from 2008 and we are unlikely to see that level again,” said Peter Costich, who manages equine loans for Limestone Bank in Lexington, Ky. totaled about $ 1 billion at the time, and we estimate today’s total to be less than half that.
Equine loans can be taken out in three main areas: Plant loans, which mainly consist of real estate loans on farms; equipment loans, in this case the horses themselves; and farm loans, with a scope that includes stud fees.
For many riders in central Kentucky, business doesn’t start without a loan, so lending activity can provide a forecast of what the next few years of industry activity might look like.
In the short term, the global economy is still trying to figure it out due to COVID-19, and the racing industry will have tough questions to ask about its business model if fans – and their live grip – stay out of the box. stands for an extended period of time. Despite this, the equine loan activity remained virtually unchanged in 2020.
Long-term forecasts paint a different picture. While the uncertainties surrounding COVID-19 may not have immediately affected the blood economy in terms of loan money taken out, Bob Feenick of Farmers National Bank said the still polarizing returns of recent years have threatened. to catch up with industry and market instability. elsewhere in the thoroughbred sector and in the world in general, could accelerate this lawsuit.
“In recent years we’ve seen the polarization of the market – a supply and demand issue is what I call it – and how it is resolved,” he said. “I think my clients’ target has shrunk in recent years. Even as the numbers go up, the cost behind it goes up and the people participating in these good returns have shrunk. “
This is important on two fronts. First, the potential conflict between supply and demand arises at a time when the foal harvest in North America is at its lowest since the 1960s. When the slowdown of the late 1980s occurred, the Foal harvest was reaching record highs of over 50,000 per year. During the stock market crash of the late 2000s, that number was still around 30,000. Today, North American foal production will struggle to reach 20,000.
There are fewer foals being born, and in turn, fewer players in the game need loans to jumpstart their initiatives. Because this group is smaller, Costich said the number of banks dedicating resources to horse lending has also declined.
“I would attribute this to banks that no longer have expertise in the area,” he said. “Large institutions are less willing to invest the time and resources necessary for equine lending. Over time, for one reason or another, they left the company.
Second, the polarizing market has made commercial thoroughbred breeding more of a “high risk, high reward” business than ever. Record averages have driven up service costs, forcing subsequent foals to meet or exceed these high initial prices to cover costs or profits.
Because the goal has become smaller to make money in the commercial market, let alone repay loans, Feenick said farmers have focused on shorter-term loans in recent years and are lending on lower value percentages to reduce the risk of default. the borrower.
“Our settings have generally been roughly the industry standard that we will lend up to 50% of the value,” he said. “I’m going to tell you if I have someone who’s near this right now, they’ll probably run out, come in the fall.”
“I hope we have been vigilant enough in this area, and my clients have worked with me, that they should be able to come up with Plan B and C if the market were to change significantly,” continued Feenick. . .
If the market was on an uptrend and demand still caught up with supply, as in 2012 and 2013, Feenick said he wouldn’t be so concerned that the commercial livestock industry is resisting. to a potential hit like COVID-19 and all. of its complications. However, in a market already plagued by overcost and overproduction, it might be more difficult to find buyers at the expected price beyond the chosen few.
Feenick said the long-term nature of the thoroughbred breeding market means it will be a slow vessel to recover, as has been the case in the past.
“The market will always be over-correcting,” he said. “We cannot correct the production and stud fee market for three years, no matter what happens in September. If the market starts to recover after that, the next two harvests will be cheaper and smaller. It will always be over-corrected because it must allow three years for reproduction. If the market starts to go up, it will take a few years for production and costs to catch up, and that’s where we’ve been for a few years – production and costs have caught up. “
No matter what happens this year, the next or beyond, the market has always been cyclical in nature. Both Feenick and Costich have said operations that persist are those that prepare for drought when it rains.
“We’ve seen our share of sales as well as disappointments, which helps us avoid overreacting to a particular sale or year,” Costich said. “COVID-19 is just one of those variables that no one saw coming. Strong traders have figured out how to handle their unique set of circumstances and are working their way through it. “
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