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EDITORIAL, The Proprietor gets on the Soap Box, |
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Transparency in the market for bloodstock.
Since we wrote this in early 2004 the Federation of
Bloodstock Agents has published it's Code and the Jockey Club have backed
it with the use of their powers to warn off any miscreants. In the USA Satish Sanaan started a lobby to do something similar in the US and
they've now got ethical standards too
. He
reckons that he was run up in his early forays into the market (so you
didn't mean to pay Gns2,400,000 for Padua's Pride as a foal Satish ?) but
he's smarter nowadays and to prove it he didn't show up at the
yearling sales last year.)
Whatever happened to spitting on your hand and shaking on it? When did
'luck money' become a 'bung'. Top story to follow in early 2004 was the one that Richard Evans was
running in the Daily Telegraph. He used the judge's comments in a civil
case about the aborted sale of a filly called Foodbroker Fancy to call for a cleaning of the "Augean stables" of the bloodstock
market and a system of regulation to ensure transparency in dealings, both
private sales and at auction. The sale of the filly was brokered by Charlie
Gordon-Watson and the judges comments were centered on a payment offered
to the trainer of the filly, David Elsworth, to 'get the sale done'. The
owners of the filly didn't appear to be concerned that this offer had been
made to Elsworth and they would seem to us to be the only party who could
have been said to suffer as a consequence and thus reasonably
have a view about it. In fact they still have horses with him. I don't
suppose that Richard Evans will be in the front rank to interview David Elsworth in
the winners enclosure for a while. He might also be a little more careful about his fact-checking. He
keeps writing that the filly was eventually sold to "a French stud" when
it was actually sold to Normandie Stud in Sussex.
Anyway, Richard Evans developed this story into a spread in the Sports
section of the Daily Telegraph the main thrust of which was that racehorse
owners were being tricked into overpaying for horses bought for them by their
trainers or, if they used them, by their bloodstock agents. The agent or
trainer would do this by agreeing a price with the vendor of the horse
before it went into the ring in return for which the vendor would pay the
agent a commission (euphemistically sometimes called 'luck money'). Now
the owner would not know about this and would therefore suffer in two
ways. Firstly because the trainer or agent could not be representing the
owners interest by taking a payment from both sides of the transaction.
And secondly by paying a price for the horse which was inflated beyond its
true market value as a consequence of the apparently transparent public
auction being rigged by the agent and vendor colluding to achieve
a hammer price which would not otherwise have been reached. In other words
the horse sells for more than it 'should' have. One of the difficulties in
all this is the that there is no objective value for a thoroughbred other
than what one person is prepared to pay for it at a particular point in
time.
The curly wig is mightier than the trilby
The upshot is that the inevitable committee has been
formed to agree some form of self regulation and the Jockey Club have
promised to use the full majesty of their powers against any miscreants.
Despite all the publicity there was no sign of any migration to the moral
high ground at the Breeze Up sales, the first to take place since the
issue blew up. There were agents looking for their 5% from vendors and
talk of a trainer being investigated by the Jockey Club for taking bungs
from vendors.
So here's our suggestions.
Owners should have a written contract with the person who acts on their
behalf for the purchase of a horse and it should explicitly forbid the
taking of payment by the agent from anyone connected with the transaction
except the owner. A bung would the be illegal and the full majesty of the
law, rather than the Jockey Club would come into play. The curly wig is
more daunting than the trilby.
Vendors should be able to pay commission to agents who buy from them on
behalf of owners provided the owner knows and presumably if they did know
then they would expect not to pay the agent themselves.
"its on the market"
One other change we would like to see is that Tattersalls change their
practice of announcing when a horse has reached it's reserve by saying
'its on the market' or something similar and at the same time putting the word 'Selling' on the
closed circuit TV monitors that cover the sale. The effect of this is that
bidders wait for the reserve to be reached before bidding. They see that
the horse cannot be bought and so there is no point bidding until the
auction is live. Why should the buyers help the auctioneer and the vendor
get to the reserve price? This slows down
the sale. It also often means that vendors set a reserve lower than the
real
value at which they wish to sell in order to get it 'on the market'
quickly and the
live auction started. They then have someone bid on their behalf, which
they are allowed to do under the Conditions of Sale, to their 'real'
reserve.
The effect of announcing when the reserve has been reached is that it
creates an inefficient market. One in which market values are false
because the buy side to the transaction always has more information than
the sell side. Think about it like this. The buy side knows the price at
which something can be bought (in this case the vendor's reserve price on
a horse at auction) whereas the sell side cannot know how much the buyers
are prepared to pay (in this case the budget that the owner has given the
bloodstock agent or trainer to spend).
We've sold horses at all the major auction houses in the USA and the UK.
Our experience is that Tattersalls is the best of all of them at working
to meet the needs of the vendors and the buyers but on this issue we would
like to see them change. No other auction house now does this.
If the practice was done away with the sale would be faster, bidders
would have to get involved earlier or risk missing out and vendors could
set a reserve that reflects the real value they put on their horse knowing
that for the bidders the sale is live from the moment the auctioneer opens the bidding.
The market would be more efficient. |
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Early most mornings Flash spends time glaring into the gap
between the garden wall and the pavilion verandah willing the foxes that
have their lair under the pavilion to show themselves. |
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Size does matter.
Stallion Books, the foal crop and the gene pool.
No change here since we
first wrote this. The size of
stallion books is a big as ever and now the issue has become labelled as
"over-production" (you can read our take on that above) and although the yearling market
picked up in 2004 it's interesting to note that buyers are increasingly
spending their money on the good physical type. It's the horse rather than
the hype that is selling and the best of the crop of 2002 didn't even get
to a sale in 2003 because all four of the 2004 English Classics were won
by horses bred by their owners.
It seems that there is going to be a
serious debate at last about the size of stallion books and the size of the foal crop .
Gerald Leigh has raised it in his Annual Report for Eydon Hall Stud and
there is a piece by Jocelyn de Moubray in the April Pacemaker.
Market distortions and distorted statistics
There are serious structural distortions in the market
for stallions nominations. One is the tax regime in Ireland. A second is
the much more aggressive dealing policy adopted by Darley. The
third is that the market is an oligopoly, with Coolmore and Darley
dominant.
Statistics give higher rankings the larger the number of
foals (runners) conceived. Quantity is raised above quality.
It seems that there is going to be a
serious debate at last about the size of stallion books and the size of the foal crop .
Gerald Leigh has raised it in his Annual Report for Eydon Hall Stud and
there is a piece by Jocelyn de Moubray in the April Pacemaker. Before I join in let me
declare an interest (two actually). The first is that we own first
season stallion Arkadian Hero. The second is that I'm a director of the
National Stud. We're expressing an opinion here as breeders.
Market distortions and distorted statistics.
There are serious structural distortions in the market
for stallions nominations. One is the tax regime in Ireland. A second is
the much more aggressive dealing policy adopted by Darley. The
third is that the market is an oligopoly, with Coolmore and Darley having
a combined market share in 2001 according to Pacemaker of 39%.
These structural distortions are compounded by the spurious statistics
used to compare stallion performance Statistics which give higher
rankings the larger the number of foals (runners) conceived. Quantity is
raised above
quality.
As a result the market for stallion nominations is not a free
competitive market. The structural distortions give rise to barriers to
entry and the smaller competitors are squeezed.
The oligopolists (OK Coolmore and Darley) are not abusing their dominance
on price, far from it. Nominations, at the time of purchase, are often better
value at all levels than ever before. That seems to be good for mare-owners. But what's not so good is the
eventual value of the product at the time of sale. With more yearlings to pick from buyers
will be even more choosy and the huge differential between the top prices
and the middle, let alone the bottom, will get even bigger. Decisions
taken on the demand side of the market (mare owners) take a year or more
to have an economic consequence. (Despite the Darley payment deals all
actions eventually have consequences). The bubble in the size of the foal
crop, which is closely related to the size of stallion books, will have
the effect all bubbles have. Money will be lost.
UK and Ireland compared to the USA
The above is a problem particularly acute in the UK and Ireland.
Our limited
personal experience so far dealing in the American market is that it
is free of the structural
distortions of the European market, is more competitive and as such offers a better economic
environment for mare owners. Having said that stallion books are still
bigger than they probably should be. In 2001 53 US stallions covered books
of over 100 mares, 43 of them were in Kentucky, 10 in Florida. The top 3
were from Coolmore's American operation, Ashford, with Grand Slam (166),
Tale of the Cat (147) and Southern Halo (141).
To give you some comparison the foal crop annually in America is about
33,000 (lower last year because of MRLS in Kentucky) compared with 15,000
in 2001 in the UK and Ireland combined, where 32 stallions covered books
of 100 plus. Admittedly some of the 32 will be National Hunt stallions but
the numbers of foals produced in the USA have to supply a far larger
racing end-use market than is the case for the UK and Ireland crop and the
end-use market in the USA is far better funded in terms of prize-money
return.
The improvement of the breed
Our real point here is that the market economics which mare owners operate
within in the USA are not necessarily more benign than in the UK and
Ireland but rather that they are not distorted by tax regimes or by
oligopoly. The economics of the market are more free to work to reward
quality and drive out mediocrity. Which is what the whole purpose of
breeding thoroughbreds is supposed to be founded on in the first place.
More worrying is the fact that we've no idea what longer term collateral
effect the market distortions are having on the gene pool*. Maybe none, but
wouldn't it be sensible to have a professionally qualified geneticist do some
work to tell us? Rather than rely on the amateur geneticists who write on
bloodstock in the trade papers. Welcome as Tony Morris' and others
opinions are we'd rather know what, for example, Professor Steve Jones has
to say on the subject before making any long term decisions.
We profoundly hope the thoroughbred business keeps debating all these
issues. It takes mare owners to make a
stallion book not just stallion owners. All mare owners have been part of
the problem. Mare owners will be part of the solution.
Finally, if the OFT can look at competition issues in the racing and betting
market why don't they look at the stallion nomination market? Because they
have to have a complaint first. Who's going to do that ?
*On May 3rd the British Horseracing Board announced a £2m grant
over 5 years into genetic research but no indication was given that
research will be into the subject of the effect of large stallion books on
the gene pool. |
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The Guineas
and Kentucky Derby weekend. What's it all mean?
(First posted May 6th
2002, and updated August 2nd 2002). Things don't feel like they changed
since we wrote this. The 2003 Kentucky Derby was won by Funny Cide, a
gelding and a New York bred at that. He cost his owners $75,000. 2004 was
won by Smarty Jones a Pennsylvania bred who having gone on to win the
Preakness looked like he could be the Triple Crown winner that the US
scene has been waiting for until he was caught in the shadow of the post
to finish second in the Belmont.
What do you make of the outcome of the Classics run over the
first weekend in May?
The Kentucky Derby was won by an outsider, War Emblem. He cost $26,000
as a yearling and is by Our Emblem who stood this breeding season in
Maryland for $4,000 (not for long). He was bought by Prince Ahmed Salman's
Thoroughbred Corporation for a reputed $1,000,000 a couple of weeks ago
after winning the Illinois Derby.
The following day the 1,000 Guineas was won by Kazzia for Godolphin.
They bought her last year after she won a Group 2 in Italy. She was sired
in Germany by Zinaad who stands there for Euros4,000.
If this all means much at all its probably only that top class
thoroughbreds can still be bred on modest budgets by lucky breeders and
that extremely rich men will buy proven racehorses for top dollar in their
for their quest for glory. (Since first posting this on May 6th Sheik
Mohammed has bought Fight Your Corner, winner of the Chester Vase, trained
by Mark Johnston and bought by him for Gns15,000 and Hamdam al Maktoum has
bought Bandari, twelve length winner of the Gr.3 Lingfield Derby Trial,
also with Mark Johnston. Both, not surprisingly were supplemented for the
Epsom Derby. At £90,000 a pop. They were out of the money on the day).
Did the best horse win?
War Emblem led from wire to wire. None of the fancied runners took him
on for the lead. Ken McPeek trainer of Derby favourite Harlans Holiday
said "I just think we kind of got caught with our pants down the first
half mile - like everyone else. That's my fault and that's horse racing".
Meanwhile 8 hours earlier in the 2000 Guineas the best horse in the race
finished second. The winner came up the far side on faster ground than the
second who came up the stands side. The field split into two groups with
the high numbers going far side and the middle and low numbers up the
stand side. Rock of Gibralter won from stall 22 beating Hawk Wing, the
favourite, drawn 10. What this means is that given the random
nature of the Universe the bookmakers will always beat the punters.
(Since first posting this on May 6th War Emblem has now won the Preakness
Stakes off a contested lead but missed the break in the Belmont and
finished down the field. Meanwhile Rock of Gibralter has won the Irish
2000 Guineas without coming off the bridle, the Gr.1 St. James Palace
Stakes at Royal Ascot and the Group 1 Sussex Stakes at Goodwood to win his
sixth Gr.1 on the trot. Hawk Wing was second in the Derby and won the
Group 1 Eclipse Stakes at Sandown).
But in the search for the meaning of life there's help at hand.
Nature or nurture. It's
all in the genes is not what it means.
It's been announced that £2m is to be given over 5
years by the BHB to continue the pioneering work done at the Animal Health
Trust on the equine genome.
The main objective is to determine which genes give rise to faults in
thoroughbreds. Wind problems and unsoundness are obvious areas of
interest. So in a few years time consignors will be asked by bloodstock
agents, "has this horse been screened for the wind gene?" not "can we have
this horse scoped?"
According to the story in the Racing Post one finding already is that
68% of the genetic inheritance comes from the male side, which, if it's
true, has a clear bearing on the issue of large stallion books (see the
opinion piece below).
But listen to this. The other finding is that about (only?) 35% of a
thoroughbred's ability is contributed by genetic factors and the remaining
65% by environmental factors. Setting aside a natural scepticism about
eye-catching headline statistics, could this be the reason why the
Ballydoyle Team are more successful than Team Godolphin? Are they just
better at nurturing the talent that nature has endowed? |
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