Over the last two years, across the board, across industries, we’ve lost net worth of between 30 to 40 percent since around October of 2007, when most markets peaked. The magic figure, to use an average, is about 35 percent losses, which is neatly and equally applicable to the stock and horse markets.
This 35 percent figure is exactly the decrease in the amount of money available to Kentucky breeders in 2009 versus 2008 from the three major banks in Kentucky that deal in equine lending. These banks — National City Bank, JP Morgan Chase, and Fifth Third Bank — lent about a billion to breeders and owners in 2008, but in 2009 the three combined had only 650 million in loans to offer horsemen through their equine lending divisions.
In 2010, this figure is expected to drop to 450 million, with National City’s equine lending division rumored to close altogether. This will create a tremendous credit crunch for breeders — will 35 now become 55? — and will no doubt squeeze some people out of the business entirely.
Breeders borrow money in the spring to pay for stud fees, and they pay off the notes in the fall when yearlings and weanlings are sold. This cycle was affected last fall when yearlings and weanlings dropped in value, causing some to default on loans, but it’s expected that the fallout will be even greater this sales season.
“The whole cycle will be severely affected this year,” a Kentucky breeder and farm owner said recently. “Last year, the yearling sales came before the big market crashes in October, which affected the mixed sales, but not the yearlings as much as it could have. But this year everyone’s going to feel it. Stud fees had gotten too high, and there were many yearlings that weren’t making stud fee before the market crashes anyway. Now, those foals conceived in 2007, when the market was at it’s peak and stud fees were at an all-time high, will enter a depressed market in 2009, and we’ll have to use those proceeds to pay off notes. There’s going to be a big gap to cover.”
Many breeders hedged investments this spring by entering into foal-share agreements, instead of paying stud fees through borrowed funds, but the lack of funds circulating through the breeding “food chain,” along with credit squeezes, market declines, and overall industry malaise — no Kentucky slots, Breeders’ Cup losses, etc. — project a gloomy future for the Kentucky breeding industry.