Thoroughbred breeding and racing doesn't get much better than WinStar Farm.
In 2010, homebred Super Saver won the Kentucky Derby and WinStar-owned Drosselmeyer won the Belmont, giving the Versailles farm two legs of the famed Triple Crown. They capped that with an Eclipse Award in January for owner of the year.
The farm stands some of the top stallions in the business and has a new Derby hope: Super Saver's half-brother Brethren.
WinStar will need every bit of that success and more in today's equine financial climate.
"For 2011, we're forecasting to operate at a loss," said Elliott Walden, WinStar's president, CEO and racing manager. "Last year we were pretty close to breaking even because of the Derby."
But for every Derby winner, there are hundreds of farms trying to scrape by.
"What that speaks to is the difficult environment we're dealing with in Kentucky," Walden said. "If WinStar's struggling, just think what the other breeders are going through."
Across the board, from small to large operations, most farms are experiencing tough times. Central Kentucky breeders say there are fewer horses in the state, employment is dropping, and farms are expanding elsewhere while contracting here.
According to numbers released earlier this month in accounting firm Dean, Dorton, Allen & Ford's 2010 industry survey, more than half of the Kentucky farms said the number of horses they board has dropped and that they froze wages for their employees last year. They also said credit with banks has been harder to come by — if they can get it at all.
Worse than rest of state
Ken Troske, an economics professor at the University of Kentucky, said that the economic picture for the horse industry appears to be worse than the state's overall economy.
"Employment in 2010 was up slightly in Kentucky and the U.S., as well," Troske said. "We had positive jobs creation."
Employment in agriculture has long been in decline, but 2010 was a record year for farm sales, indicating growth for other sectors of the state's farm economy.
Horses were the exception.
"We've seen declines in all spending, but particularly in luxury spending," Troske said. "Owning a horse, for many of us, is easier to cut out. Clearly, (the horse industry) is suffering more. Recreational activities have taken a bigger hit."
And in this downturn, Troske said, the biggest impact has fallen on lower-wage workers, such as horse farm labor. For that sector, unemployment has been 40 to 50 percent, well above the 9 to 10 percent national unemployment rate.
John Sikura, owner of Hill 'n' Dale Farm, a major breeding, boarding and sales operation in Lexington, said the math is simple: "Fewer horses, fewer employees."
The size of the Thoroughbred foal crop and the number of mares bred here have been dropping for years. Although Kentucky continues to dominate the breeding industry, more than 1,300 fewer foals were born here and almost 1,800 fewer mares were bred here last year than in 2009.
In 2011, the North American foal crop will decline an additional 10 percent, or about 3,000 fewer foals, The Jockey Club estimates.
Despite the industry-wide contraction, a few states have managed to buck the trend by using slots to plump purses at the racetrack and to offer extra money for state-bred winners.
"Mare owners under economic pressure will concentrate their mares where it's most lucrative," Sikura said.
And stallions will follow.
Hill 'n' Dale has sent several low- to mid-range stallions to other states, Sikura said.
"There's not the market to breed the $5,000 horse in Kentucky," Sikura said. "If you're standing that horse here, you're standing alone."
Buying farms elsewhere
The numbers are no surprise, said Bill Farish, whose family owns Lane's End Farm in Versailles.
Farish, who is also chairman of the Breeders' Cup board, has called for slots at tracks to help Kentucky racing.
"We've all been screaming that the mares are leaving the state, and the jobs follow," Farish said. "I definitely think it's bleaker (in Kentucky). Where you have seen something growing — in Pennsylvania or Louisiana — it's growing at our expense."
Tom Ludt, manager of Vinery farm, said this is the first year the stud will not stand a new stallion in Kentucky. Vinery's new sire will debut elsewhere instead.
"When you get mares or stallions relocating, that's not a business model that can be changed quickly," Ludt said. And his business is shifting.
Vinery bought one farm in New York already this year and will close on another in March, he said.
"We're not buying farms in Kentucky," Ludt said. "We're going to be further expanding in New York at a time when we're contracting in Kentucky."
All about the jobs
That contraction can be felt all over the region, as farms either lay off workers or don't replace those who leave.
Suzi Shoemaker, owner of Lantern Hill Farm near Midway, said she sees it every day.
"We have had a steady stream of people looking for work," she said. "Beginning in September 2008, two or three people a day would be stopping by the farm looking for work."
In previous years, Shoemaker said, she was always recruiting experienced, qualified people. But not now.
"We're not hiring and we're not looking," Shoemaker said.
Catherine Parke, owner of Valkyre Stud in Georgetown, said her operation, which relies on out-of-state owners boarding their mares here to breed to Kentucky stallions, has cut farm staff from 12 people to seven.
"When you have 40 to 50 percent fewer mares, you have to lay off people," Parke said. "It's all about jobs. It's a bunch of small farms like me that are the meat of the industry. It's slipping away."
Looking for revenue
The answer, breeders at all levels say, is to make Kentucky-bred horses worth more.
"We've got to figure out a way to keep our purses up, so people want Kentucky-breds, so there's a reason to keep a horse here," Parke said.
Echoing that was Craig Bandoroff, owner of Denali Stud in Lexington, a top consignor at Keeneland's auctions.
"They have to do something to make a Kentucky-bred mean something to a buyer," Bandoroff said. "I don't think we have to be on equal footing (with other states). We have some inherent advantages. We just have to narrow the gap."
Kentucky racetracks and many in the breeding industry have long argued for expanded gambling at tracks to boost purses and breeders' incentives.
Gov. Steve Beshear and state House Speaker Greg Stumbo, both Democrats, have supported gambling initiatives, but state Senate President David Williams, a Republican, has floated alternatives such as a tax on advance-deposit wagering, the only segment of horse betting that is growing.
Churchill Downs' TwinSpires.com, is poised to become the largest advance-deposit wagering operation in the country and recently hired 25 additional people for its Lexington offices. This week, after a $1.4 million renovation, Churchill showed off its expanded facility to VIPs including Beshear, saying more growth is expected.
State Sen. Damon Thayer, R-Georgetown, said a current House bill sponsored by state Rep. Larry Clark, D-Louisville, would require advance-deposit wagering licensing, which could be the first step to tapping a new source of revenue.
Thayer said he hopes to work during the interim leading up to the 2012 legislative session on a bipartisan bill to increase money going into the Kentucky Thoroughbred Development Fund, which supplements purses for Kentucky-bred horses.
Increased purses would make Kentucky horses more attractive to buyers and draw more horses back to the racetrack, which would in turn increase betting, Thayer said.
"It's the perfect way to attack these issues on multiple levels," Thayer said.
One stumble impacts many
Meanwhile, with breeders short on stallion fees and bank credit and long on debt and bills, the economic dominoes continue to fall around Central Kentucky.
Last year, the big races that weren't won by WinStar horses were often won by Lookin At Lucky, bred by Gulf Coast Farms.
Lookin At Lucky won the 2010 Preakness and Haskell Invitational as well as back-to-back Eclipse Awards.
But even while their horse was hitting the top ranks, Gulf Coast's Gerald Bailey and Lance Robinson were attempting to stave off financial freefall, selling mares without reserve prices to meet bank obligations. Fifth Third Bank sued Gulf Coast in January, alleging it defaulted on $15 million in loans.
Gulf Coast's problems hit Taylor Made Farm hard, said Mark Taylor, vice president of public sales. Taylor Made, in Jessamine County, is the largest consignor at Keeneland's yearling and bloodstock auctions and one of the largest boarding farms anywhere.
"We're down about 15 percent on mares boarded this year over last year," Taylor said. "Most of that is due to the dispersal of one big client: Gulf Coast Farms."
Gulf Coast kept about 80 mares there — by itself accounting for almost an entire division of Taylor Made.
"It was huge. We're used to having 50 nice Gulf Coast babies coming through the ring in the yearling sales," Taylor said. "Now, we won't have that anchor."
The end in sight?
But WinStar's Walden said there might be light at the end of the downturn: The farm's stallions — which include top sires Distorted Humor, Tiznow, Harlan's Holiday, Speightstown, Bluegrass Cat and now Derby winner Super Saver — are keeping busy now that breeding season has begun.
If the economy turns around, WinStar and many other Kentucky horse farms think they can rebound in 2012 — if they can hang on that long.
Dean, Dorton, Allen & Ford's annual "Thoroughbred Business Year in Review," an industry-wide report out last week that looks at the auction market, found that while sales in 2010 were bad, they weren't nearly as bad as in 2009.
In an analysis of yearlings sired by stallions with stud fees of $10,000 and above (that's only about 30 percent of all yearlings sold publicly), only the top half of the yearling market came close to breaking even. Yearlings sired by stallions with stud fees below $30,000 on average lost money if they sold at all.
But that was an improvement over 2009, when even yearlings at the very top — sired by horses with stud fees of $100,000 or more — lost money.
Doug Dean, a partner in the firm, said he thinks the flattening out of the market could be a good sign.
"The adjective I think best describes what I'm seeing is 'stabilization,'" Dean said. "There's no question the data shows it's been a tough, tough market for breeders for the last three years. But you don't see a worsening trend, and in some cases you might see improvement."
And, although the drop in mares hurts boarding operations, the reduced supply of foals should help at the sales.
"If demand stays the same, the decreased supply ought to put upward pressure on prices," Dean said. "Then, if the economy turns around, that ought to lead to meaningful improvement."
Starting a racehorse from scratch takes at least three years: one to gestate and two to grow up. The earliest a horse can race is 2 years old, although many don't run until they are 3 or older.
Reversing the breeding market will be more like turning an aircraft carrier than a rowboat.
Walden said most breeders expect the yearlings they will take to auction this fall to sell at a loss because they were bred in 2009, just as stud fees were starting to come down.
"It will be 2012 before prices reflect the true market," Walden said. "So, 2012 looks better."