An Economist's View on Trends in Racing and Breeding
Dr. Lauren Stiroh
Dr. Lauren Stiroh, Managing Director, NERA Economic Consulting

STUART S. JANNEY III: Over the years, The Jockey Club has commissioned myriad studies as a service to the industry to help the future of our sport. For example, the Pugh-Roberts report of 1974, Bruskin in 1986, Penn Schoen Berland at the 2013 Round Table Conference, and of course the three McKinsey studies in 1991, 2011, and 2018.

Despite the many initiatives and benefits to the sport that have resulted from these studies, in 2022 weíre now no more settled on the future than we have ever been. At the heart of the many economic trends for us is the foal crop, which has been steadily declining over the last few decades.

The Jockey Clubís estimate for the past several years has been fewer than 20,000. That fact is a dominant reality as racing secretaries try to write their books and fill races, and basically to satisfy betters who have consistently shown their aversion to small fields.

As a first step to understand and hopefully reverse these trends, The Jockey Club focused on the need for a study of the economics of breeding and racing.

We approached Dr. Lauren Stiroh, managing director the NERA Economic Consulting, and we are in the preliminary phases. We donít at this point have any strong conclusions, but we do want to share what we know. I would like to welcome Dr. Stiroh here today to talk to you all about it.

DR. LAUREN STIROH: Good morning, and thank you for having me. Iím Lauren Stiroh, and Iím an economist, and I feel that I should start by saying that Iím not a horse owner or horse breeder, trainer, or to my own regret, a jockey.

I was asked by Jim and some members of The Jockey Club to take a look at some of the trends that are apparent in the data and tell you what I think and what I see as an economist, somebody outside of the industry looking in at what the data say.

So I started by looking at the same facts that weíve just heard about. The various things youíre all familiar with before you walked into this room, but it was a starting place for me to understand what does the industry currently look like what how did we get here.

So the starting place: The decline in the foal crop. What weíve seen, as was just mentioned, a 30-year decline. Itís now about 50% of what the foal crop was in 1990.

When I look at this picture, what I see isnít obviously a steady decline over that entire period. I see two periods of quite a steep decline. The early Ď90s and the later part of the 2000s where the foal crop was declining quite steeply, and in other parts of the time period itís either increasing or stagnating. So that was something that I wanted to understand more about.

What I looked at as well is what was happening with the breeders. What this is showing is when I compare the two on an index, I see that whatís happening with the breeders pretty well closely mirrors what we see with the foal crop. A decline in breeders that matches that same period of steep decline, somewhat of an increase, steep decline again, and then a bit of a levelling off.

Over that same period, the number of foals per breeder has gone up only slightly. What this tells me is the distribution of the foal crop is fairly broad based. Itís happening everywhere. And so we looked everywhere in the United States.

What we see is that itís a countrywide phenomenon. There are declines in the foal crop from coast to coast, where the foal crop has almost disappeared entirely on the east coast, very big declines on the west coast, and only two states, Indiana and Kentucky, that actually had an increase in the foal crop over the 30-year period that is shown on the slide.

I am going to change the slide to look at breeders, and your eyes probably donít even register what that change was. The picture looks the same. We see increases in only Indiana and Kentucky, and declines in the individual breeders across all of the rest of the states.

So here is whatís happened over time. In 1990, there were five states that accounted for just over half of the foal crop. By 2019, Kentucky now accounts for almost half of the foal crop. The other four of the five big states have declined considerably, and the rest of the states have declined as well.

So as an economist, those are my facts Iím going to start with. Of course, I want to look at some supply and demand factors. Again, I feel like I need to emphasize, this is as an outsider looking in at various things and looking for what are trends in the data, what do I see.

So I start with some of the factors affecting the horse owners, the sales prices. I will point out this is a different time horizon, so the hashtags that you see at the beginning are sort of a visual reminder. Iím now looking at a little bit of a shorter window.

But I donít see very big increases in the prices of weanlings. I see more vary variation for yearlings, more variation for 2-year-olds, but generally looks pretty positive. Theyíre at least not going down. Theyíre going up a little bit.

Of course you see a fairly big dip in 2020, and that corresponds with the onset of COVID. I would say thatís a blip and not read too much more into that. Hopefully thatís a blip and weíre going to now move on with our lives.

I looked at the real purse earnings for a starter. This again, we are back to the longer time horizon. Some increases, some decreases, but not as dramatic as what we saw for the foal crop.

If I overlay, though, the blue bars that showed up in the background, those match up to the periods where, as I mentioned at the beginning, we see the strongest decline in the foal crop. When we see a decline in the foal crop, we see an increase in the real purse earnings, and where we see the foal crop either increasing or levelling off, we actually see decreases in the real purse earnings for a starter.

Again, the data at the end of the period are not complete here. Those horses are still racing, and so they havenít yet finished earning their lifetime earnings.

I looked at the stud fees. Stud fees show a fairly similar picture as well. Again, this is a shorter time horizon. What we see if I overlap with the periods where there was a steeper decline in the foal crop, we see that average advertised stud fees were coming down as the foal crop was declining fairly sharply, and then increasing as the foal crop kind of levelled off.

If I look at the total stud revenue I see a fairly similar picture. Here again, weíve got the decreases at the time when the foal crop was decreasing, which makes sense to me as an economist. If weíve got less demand for stud services because there are going to be fewer foals, then the price is declining.

But thereafter, we see a pretty strong recovery. So on the revenue side, the money coming in, Iím not seeing anything that matches the overall decline in the foal crop. Iím seeing things that could make sense, but nothing thatís really giving the full picture of whatís going on.

Iíve got in this slide deck only one of the cost pictures, and in the interest of actually getting to see the races today, I am only going to show you one picture of the cost of raising a horse.

What I see in this one, and I will tell you there is a lot of data about cost that will all show different pictures but here weíre all probably familiar with the cost going up over the last few years.

Thatís the dominant thing in this picture. When weíre actually seeing a -- I was about to say stagnation, but I will say a stopping of the downward decline in the foal crop, that matches the period where costs are going up most dramatically. Where costs were lower or more variable, that was the period where we saw the foal crop declining more quickly.

So of course costs matter to your business. No economist is going to say otherwise. But this again doesnít really match up with the picture I was looking at earlier where we had the sharp declines early on in this later period that the foal crop had averaged out.

What I think it could mean though is one of the reasons we havenít seen the recovery yet in the foal crop, in spite of various investments, could be cost driven.

So I think this is an area for further investigation, to look into whether that is the explanation for why it is that we donít see quite a close match between costs and output.

So Iím going to look at then a few other conditions. This is outside of any of the control of anybody that is in the business. As an economist, when I look at a picture that shows a decline in what I would call output, the decline in the foal crop, I will anticipate that there is some sort of global economic factors that play a role. What is overlaid on this picture, the gray bars are periods of recession. Recessions are times when economic conditions are bad for everybody. Theyíre bad for horse racing as well.

So we do see some interplay between negative economic conditions matching up with periods where the foal crop is declining. It doesnít explain everything, though, so I want to keep looking to see what it is that could match this pattern. I looked at the number of races, the number of races coming down over time. Itís highly correlated with the decline in the foal crop. There is clearly more of a rich story there.

I looked at the average field size. It doesnít come down quite as strongly, but certainly itís been coming down over time. There is more of a story there.

I then looked at the pari-mutuel handle, the real handle in real terms adjusted for inflation. This was the strongest picture I see where I can see something outside of raising horses that really matches quite closely with the picture that I see for registered foals. This is the one that matched more closely than any of the individual data that I looked at.

Now, when I put something up on chart, I can only show you two things at a time. We only have two dimensions to work on, so Iím limited in what I can do. When I do a regression, this is an economistís sort of magic tool box where itís like looking at the matrix. We can now see the matrix and everything thatís happening at the same time.

So I can put in more of the variables and see what is associated, what is a strong factor in being able to predict whatís happening with the foal crop and what is a weaker factor. And what might be surprising, what is at the top of the list, that real handle, what I can see with my eyes as matching up with the changes in the foal crop is probably the strongest predictor of if I knew what the real handle was, the number of races, the real GDP, and the average stud fee, if you look down, youíll see an R2 at 98%.

Thatís a huge explanatory power for regression analysis. That would tell economists, this is a really awesome regression. A lot of the variation can be predicted by knowing only those four factors. There is more to be understood of why these particular four factors, why are they the ones that seem to be so closely associated with changes in the foal crop.

But these are ones that I think require some additional investigation. The one that is the strongest, the real handle, I wanted to look into that. Why is it showing that same pattern that we see for the foal crop.

So I am looking at a few external factors I called them there in the last slide. The first is the age of the audience. Everybody gets older over time. The median age in the United States over this time frame from 2006 to 2016 hasnít actually changed very much. Itís aged slightly, but itís still around 37 years of age.

The age of television audiences for all sorts of sports has been increasing, but the age of the television audience for horse race is pretty near the top of the list, and has aged more than some of the other sports.

I mentioned the handle earlier. I looked a little deeper into that. What youíre seeing is this the decline in the on-track proportion, the on-track proportion of the total handle, and that is the rest of the total handle. Itís been moving off track. This is familiar to you all, but by 2021, 95% of total handle was off-track rather than on-track.

I think that matters for a number of reasons. When I look at the handle, and I showed the picture earlier that it goes down over time, this is showing you that for the beginning years of the period it was increasing very slightly. Itís close to that dotted line. Thatís positive growth. Once it dips below the dotted line, thatís negative growth.

The green line is expenditure on gambling through all means. Itís been going up the entire time frame. Itís always positive. There is a growing difference between all gambling through all measures, and then gambling on horse races in particular.

Now, that obviously has got some good explanations. We know why thatís going on. Iíve got kind of a grandiose title on this. Call it claiming to have a history of gambling in America. There is a lot on this slide, but I only want to point out a couple of things that again will be familiar to you, but I think this is explaining a lot of whatís underlying that picture.

Horse racing used to be the number one sport in America in the 50s, number one spectator sport. By the 2000s, itís fallen to 13th. So itís lost some of its audience. Its audience is going to different things. In spite of innovations, in spite of other ways to generate some interest, and in spite of that investment into the industry, there has still been this overall decline in the amount of betting on horse racing. I think a lot of that could be explained by competition from other venues now.

Where horse racing used to be in a pretty good position of being the only opportunity to gamble on sports, over this time horizon there have been regulative changes, and by the end of the period weíve now got 26 states that have legalized sports betting. So horse racing is not only competing with other online types of bets, itís competing with all other sports now as well.

So a couple of takeaways here. One, that where I started, I think itís a fairly broad-based trend in the decline in the foal crop everywhere but two particular states. The economics for horse owners, thatís purse earnings, sale price, and stud fees havenít demonstrated that same decline, and in fact have had some growth over the period.

I think that there is probably more to be explained by looking outside of the industry and looking at what is explaining changes in total handle, and whatís the link between whatís driving the total handle and what is driving the decline in the foal crop.

I will always say that economic conditions matter. I think the overarching point is that the industry is becoming more and more vulnerable to competition from other gambling, other gaming industries.

And then just as a takeaway, to reverse the trend I think what needs to be focused on is attracting younger audiences and continuing with the investment to develop and pursue new revenue opportunities beyond just the handle.

Thank you for having me.

STUART JANNEY III: Thank you Dr. Stiroh. Obviously, thereís more to come, but that was a very interesting presentation with lots to think about.

Before we take a 10-minute break, I would like to share with you that on Saturday the board of stewards ratified two new recommendations from The Jockey Club Thoroughbred Safety Committee.

To ensure the veracity of medication reporting disclosed to regulatory authorities, the committee recommends comparison of the out-of-competition testing sample with medical record disclosures. The committee further reminds the discrepancies should be investigated, with sanctions possible for responsibility parties.

The committee also recommends that all racetracks and breeder associations appoint an aftercare liaison to facilitate the smooth transition of horses at the end of racing or breeding careers into second careers.

For too long horses that retire from breeding or racing have become untraceable. It only takes a few high-profile horses appearing on social media in terrible circumstances to polarize public perception. I thank the TSC and staff for their continued diligence in identifying areas to improve the health, safety, and welfare of Thoroughbreds.

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