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In this month’s international thoroughbred magazine I examined the profitability of first season compared to subsequent crops. The full text is shown below:

First season sire-watch the bidding go higher
Second season sire- will find a buyer,
Third season sire- results will be dire
Fourth season sire- playing with fire.

One of the mysteries of the bloodstock markets has to be the infatuation with first season sires. Inevitably 90% of new sires disappoint, yet buyers still covet to the next big thing. I analysed the commercial returns on the main UK and Irish stallions who retired to stud in 2006 and plotted the profitability of their first four crops. The results are shown in the table below and summarised in my above piece of doggerel. It may not appear in too many poetry anthologies but I think it gives some useful guidance to commercial breeders, when deciding on a mating.

Methodology and findings

My analysis was based on stallions who retired to stud in 2006 and who remained standing at stud in the UK and Ireland for the next four years. The averages for their yearlings sold at public auction were then plotted from 2008-2011. Stud fees and sales averages were converted to a common unit (in this cases UK guineas) and an amount of 7000 guineas was allowed for upkeep. The average sales price of each crop of yearlings was then divided by the production cost of those yearlings (stud fee+annual upkeep). The results show that the first crop of foals were the most profitable with an average sales price that was 1.42 times the productions cost and the third crop was the worse achieving only 1.07 times the production cost. The year three and four results are of course influenced by racecourse performance by the first two and three year olds for those stallions. In that respect it is no surprise to see Dubawi and Shamardal show positive results, as amongst the selected stallions they best fit into the 10% category of successful stallions.

Average vs production cost
Sire    1st crop    2nd crop    3rd crop    4th crop
Antonius pius    1.16    0.53    0.27    0.76
Arakan    0.93    0.63    0.55    0.27
Avonbridge    1.26    0.92    0.99    1.15
Azamour    1.85    2.17    2.11    1.60
Camacho    1.52    1.30    1.15    1.27
Chineur    0.70    0.81    0.83    0.63
Dubawi    2.03    1.72    2.67    4.52
Firebreak    0.94    2.89    0.71    1.77
Footstepsinthesand    1.38    1.42    1.16    1.03
Motivator    2.18    2.27    0.99    0.89
Oratorio    2.01    1.27    0.70    0.89
Pastoral pursuits    1.22    1.32    1.93    1.35
Rakti    1.17    0.53    0.48    0.23
Shamardal    2.15    2.03    1.77    2.99
trade fair    0.98    0.61    0.71    0.55
Whipper    1.66    0.92    0.35    0.65
Zafeen    0.95    1.36    0.75    0.30

Average    1.42    1.33    1.07    1.23

Weaknesses in Methodology
It is acknowledged that there are a number of weaknesses in the above analysis.
The sample size is quite small, but reflects the fact that some sires who started covering in 2006 either died, were sold or did not have enough sales representatives to provide four years results. In addition there was considerable movement in the euro/sterling exchange rate over the period and this had a significant impact on the results. Ideally an adjustment would also be made for the trend in the overall yearling markets in those particular years. The chosen upkeep cost of 7000 gns is also quite arbitrary and does not allow for the depreciation in the value of the mare. Finally it would perhaps be better to look at medians rather than averages to negate the possibility of associated parties paying very high prices for stallion offspring to achieve headline grabbing top prices that also increase averages.

Making sense of it all-Keynesian wisdom

As far as I know the economist John Maynard Keynes, never wrote about horse racing but had he done so he would surely have recognised some of his theories in operation in the bloodstock market. One of his concepts became known as the Keynesian beauty contest.  This described a fictional newspaper contest, in which entrants are asked to choose from a set of six photographs of women that are the “most beautiful”. Those who picked the most popular face are then eligible for a prize.
In terms of a winning strategy, Keynes wrote  “It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be”.

Commercial breeders are involved in such a game. They may not particularly like the first season sires they are using, but their own beliefs don’t matter, it is about trying to guess what everyone else thinks, everyone else will think. They are short term investors who exit before the fundamental value of the yearling (ie its racing merit) is known.  As Keynes also wrote “Successful investing is anticipating the anticipations of others” and when it comes to breeding it seems that people think, that people think it is worth paying more for the latest sires.
All of this irrational behaviour is possibly explained by the prejudices of trainers. As trainers handle more bad horses than good ones and one bad horse can turn them off a sire, then they are likely to dislike a lot of sires! With new sires, trainers have not had the chance to form such prejudices.

Conclusions:
It’s not easy being a commercial breeder. Survival requires profit and that requires suitable stallion selection.  The statistics above can help in that stallion selection. If breeders are to be tempted to use third and fourth season sires then breeders should be looking for substantial discounts on the published fees before the use of such stallions becomes attractive. The use of unproven stallions will continue as long as it is profitable. I will leave the final word to the great Keynes, who had sage advice, relevant to any breeders thinking about challenging the madness of the markets preference for unproven sires when he wrote “the markets can stay irrational, longer than you can stay solvent”.