Turning a Stallion Into a Cash Cow

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The media buzzed aplenty when Funny Cide pulled away in the stretch to win the 2003 Kentucky Derby. The story wasn’t just about the dream of six former high school buddies who pooled their funds for the thrill of owning a racehorse. The big story was that the winner of this prestigious race, a victory that all but guarantees a nice cash flow from the breeding shed, was a gelding. Even though the 16.2-hand chestnut has gone on to win more than $3 million and set an earnings record for New York-bred Thoroughbreds, many would say that unkind cut during the horse’s early training made his owners big losers in the Thoroughbred game.

But are they? The breeding game can be as big a gamble as the racing game. Just ask the owners of the great Cigar, the who retired after earning just a bit less than $10 million only to be found sterile at breeding time. Anyone planning to get into horse breeding at any level needs to start with a clear understanding of the odds and a solid business plan that carefully weighs all the costs as well as the potential cash and other benefits.

“Horse businesses mainly fail because of lack of planning,” says Dr. Martha M. Vogelsang, who heads the reproductive physiology section of Texas A & M University’s Department of Equine Science. If you plan to stand a stallion at stud, she says, ask yourself at what level in the horse game you intend to play. Do you want to stand a world-renowned stallion that attracts nationwide attention, or do you just want a small-scale operation breeding a few mares annually at the local or regional level? How will standing a stallion at stud fit into other activities and services already available at your farm or stable? Defining goals is important because it will drive your income expectations and cost decisions.

IS HE GOOD ENOUGH?

For starters, you need to objectively evaluate the stallion you plan to use to calculate whether he can support your goal. Is he capable of earning the stud fee revenues the breeding operation will need to turn a profit? The right pedigree, good conformation, and proven performance capability are essential.

Vogelsang points out that there is a lot of faddishness in the equine industry. There’s no escaping the fact that breeds, bloodlines and even horse colors go in and out of popularity like car bodies and clothing fashions. Are your stallion’s bloodlines currently desirable, or are you going to have to promote not only the stallion as an individual but also convince mare owners that his ancestors are worth putting into their foal’s pedigree? If the stallion does not have a competitive record of his own, does a parent, sibling or other close relative have an established reputation that might create a “shirttail effect” for your horse?

Next, you need to objectively evaluate the stallion at the end of a lead rope. Seek professional advice if you are planning to sink a lot of money into your stallion business. Your own opinion will be biased by your prior knowledge of the horse and your dreams. If you have objective horse industry colleagues, start there. You can also hire a bloodstock agent familiar with your breed, the horse judging expert from the nearest land-grant university, a licensed breed judge whose opinion you respect, or the manager of a stallion station specializing in your breed. Over time, the stallion will be judged by the quality of his offspring. In the beginning, however, he needs to stand on his own merits.

The third place a stallion should be evaluated is in the performance arena. Competition can both prove a horse’s worth for a particular equestrian activity and promote him to mare owners. “If a horse wins big or earns a horse-of-the-year title, he’ll be popular,” says Vogelsang.

WHAT IS HIS EARNINGS POTENTIAL?

People are often reluctant to geld until they’ve given a horse a chance to prove his potential. They look at the stud fees advertised in their breed’s publication and assume those horses must be making good money. If their gelding turns out to be a performance superstar, they say they would kick themselves for leaving that stud fee money on the table. But just how much money are we talking about? Plugging a stallion’s potential income into the business plan involves researching two other numbers—how many paying customers are likely to line up at the barn door, and what will they be willing to pay?

Estimating the number of mares a stallion will breed annually is crucial to a sound business plan. However, stallion owners often make rosy predictions that ignore the reality that there are already a good many stallions competing for the attention of the available mare pool. As a result, the average stallion breeds an average of just five or six mares.For example, Wanda Jean Litten of the American Miniature Horse Association says that only 5,000 to 6,000 of the association’s 34,000-plus registered stallions file breeding reports annually. Those that file breed an average of five mares annually. The situation is much the same at the American Quarter Horse Association. Debbie Black of the association’s registry office says that the average number of mares bred per stallion has held steady at six since 1997. In 2004, breeders filed 37,860 stallion reports. Of the stallions actively breeding, 71 bred 100 or more mares; 238 bred 50 or more; 818 bred 25 or more; 32,391 bred 10 or less; and 6,641 only bred one mare (there were 631 stallions with no mares listed because the reports were not accepted for various reasons).

Warmblood stallions must undergo rigorous prescribed tests in order to be approved for breeding. Without that approval, their offspring cannot be registered. While the approval process regulates the number of stallions available for breeding, it is no guarantee of a full book of mares. Patricia Donahue, registrar for the American Hanoverian Society, estimates that the Hanoverian stallions filing annual breeding reports average between five to ten mares annually.

Depending on your breed association’s practices regarding information sharing, annual stallion breeding reports can provide you with useful data. Statistics that can help you make a good estimate of how many mares your stallion might breed in a year include:

• how many mares the top producing stallion bred

• how many mares the lowest stallion bred

• the number of mares bred by the median stallion (the one right in the middle of the pack)

• the average number of mares bred per stallion (the total of all mares divided by the total of all stallions).

The number of mares available to your stallion will also be influenced by your decision to offer live cover, artificial insemination, or both. Live cover only will limit your stallion to regional mares but keep your costs to a minimum. Artificial insemination literally opens up a national, even international, pool of mares but at a much higher cost. Before you can plug that income estimate into your business plan, you also need to set an appropriate stud fee. Think long and hard about whether your stallion would logically rank at the top, the middle or the bottom of the range of stallions actively breeding based on his bloodlines and performance record. Identify several stallions you feel would be comparable to yours (think of pedigree, performance records, marketing effort, etc.). If their individual breeding reports are public information, that data—plus the stud fees they receive—will enable you to fine-tune your cash flow projections.

Vogelsang says that when a stallion is popular, a high stud fee does not seem to deter mare owners seeking to produce marketable offspring. On the other end of the scale, setting a low stud fee is not necessarily a guarantee of more mares. Vogelsang feels that when a horse’s stud fee falls below $500, he looks cheap and less desirable to mare owners.

The “shirttail effect” may figure into the stud fee you set, says Vogelsang. While a mare owner may not be able to afford the stud fee of a popular winning stallion, a brother or half sibling without a competitive record can offer closely related genetic material. That may boost a shirttail relation’s stud fee above what the stallion might otherwise command. If you pay attention to the right niche—your stallion has related bloodlines or a popular color or is the only stallion in the region with particular bloodlines—you can position him for financial success.

Remember that published stud fees, like the prices for many services, are negotiable. Stallion owners may give a break in fees to returning mares, to owners sending more than one mare, or they may barter a stud fee for training or other services. If you anticipate using any of these practices, you need to factor their impact on breeding income into your business plan.

Many breeding contracts offer a live foal guarantee. The cost of rebreeding mares that do not produce foals that stand and nurse must also be factored into your income projections. Equine tax expert Patrick Hurley of Hurley and Associates in Brea, California, reminds stallion owners that they should assume they will write off bad debts for unpaid stud fees at one time or another. He advises them to load the odds that they will be paid by using a good contract.

WHAT COSTS ARE INVOLVED?

The final question to ask before deciding to stand a stallion is, how much is it going to cost? Just as many would-be stallion breeders overestimate the income their horse might produce, many underestimate the costs of standing a stallion.

A horse is a horse, so any stallion is going to incur some basic expenses for board (or his feed and bedding upkeep at home), veterinary services, and farrier care. As an asset that your business plan is based on, you will want insurance against death or loss of use and major medical for the stallion. If you plan to provide care for visiting mares that trailer in to your farm for live cover, you’ll need some liability insurance, too. The stallion will need to be DNA tested, and there will be fees for filing annual stallion breeding reports.

You are going to need accounting advice as you set up your breeding business, and tax help on an ongoing basis. An accountant can help you set up your business so it passes the Internal Revenue Service’s various litmus tests that prove you are truly trying to make a profit. As it gets underway, your breeding business will also incur expenses for legal advice on breeding contracts and boarding contracts for mare care at your farm. Hurley notes that a contract that carefully spells out who is responsible for various costs, especially if you are shipping semen, can easily make the difference between profit and loss.

One important cost question to ask is just what level of marketing your stallion will need. Marketing encompasses a wide variety of activities, from training and competition to advertising and breeding incentives such as futurity nominations. These costs can quickly spiral out of control. Vogelsang feels that old-fashioned word-of-mouth is still the most effective marketing method in the horse industry. Advertising can be effective, but poor planning often sabotages a stallion’s marketing campaign. A full-color ad can make a splashy statement, but if the stallion’s photo is poor, it may hurt business more than it helps. Vogelsang also advises stallion owners to do some careful pencil-pushing before committing to an expensive ad campaign. If a horse stands for a $400 stud fee, for example, he is going to need to book four mares just to break even on a $1,500 ad. His owners might do better just putting up some good photos of him at feed stores, tack shops and vet clinics.

Vogelsang also notes that the decision to stand a stallion impacts your farm indirectly in many ways. That includes costs. For example, if mares will ship in for breeding, you may need to spruce up the farm to impress visitors checking out your stallion and to instill confidence that their mare will be in good hands if she ships in for live cover.

The biggest cost decision you’ll plug into your business plan, however, is whether you will only offer live cover for mares or are willing to ship semen. When Hamilton Research developed the Equitainer for shipping chilled semen in 1982, it made geography irrelevant for every breed except the Thoroughbred. That invention made transported semen practical and changed the breeding game. Along with its promise of additional income, however, come a lot of additional expenses. You can opt to send your horse to a stallion station or stud farm (see sidebar), or provide the needed equipment (such as a breeding phantom and artificial vagina) and facilities (such as a lab equipped with at least a microscope, an incubator, a freezer, and Equitainers, which cost $248 each) yourself.

The breeding experts at Hamilton Research strongly recommend getting professional training if you plan to establish a farm lab and do it yourself. Vogelsang advises checking into breeding short courses offered at land-grant universities around the country. The course she teaches at Texas A&M, for example, provides basic training in good breeding practices for less than $500.

BRINGING IT TO THE BOTTOM LINE

Tax law changes in the 1980s made horse breeding less lucrative as a business. A lot of people got out and left it to the hobbyists. That’s not necessarily a bad thing, as long as a stallion owner understands that their breeding is a hobby and doesn’t let expenses get out of control.

If you plan to add standing a stallion to a mix of equestrian services your farm already offers, such as training or lessons, track the stallion business income, expenses, and cash flow separately from the other parts of the business. If the stallion business begins to drain cash from the rest of the business, you’ll be able to staunch the flow before it gets out of hand.

There may be legitimate reasons to breed your stallion even if he is unlikely to be a profit center for the farm. There may be promotional spillover for other horses for sale at the farm or you may simply want to perpetuate the genes of a beloved horse or leave what you feel is an important genetic legacy, however small, to your chosen breed.

It’s hard to put a dollar value on these non-profit goals. Off the books, however, try to estimate dollar values for these and track them on a simple spreadsheet or just a piece of paper. That will make it easier to see how they fit into your overall business goals and whether the benefits—or losses—are worthwhile to you.

Bottom-line thinking is harsh but essential. Too many people start breeding on a small level, keep growing without a goal or a business plan and then find themselves without enough cash to stay in business, says Vogelsang. If you plan it right, however, “standing a stud as a profit center” may not be an oxymoron at your farm.