Breeding horses is not really a business.
(Or at the very least: a business like no others.)
Tax season is around the corner and I have to compile expenses and revenues. This time of the year is always a moment of brutal honesty when it comes to the money aspect of breeding and selling sport horses. Numbers don't lie. Pretty pictures don't pay the vet. Once more I have to ponder the economic realities of the year that was and look for ways to improve and to "sharpen the tools" as one might say.
I do breed horses in order to sell foals and young horses. I do get some revenues from this pursuit, I don't give them away for free. So technically I have a business.
But do I really?
There is something a little abnormal about this "business". Something that doesn't really fit what a typical business is.
It could be that the money I put in to breed a mare one month will only be recouped a year and a half (at a minimum!) from then. But other businesses have long-term investments- a movie studio for example finances movies that will not hit the theaters for years.
Or it could be that I have an extremely small inventory: one, two, or three foals a year. Well, it could be a very small business. Consultants sometimes have only a handful of big clients in a year.
Or is it that I run my business out of my home and work for free? While this is not good business practice, I think a lot of small business owners practically work for a very small amount of money when all is said and done, every penny being invested back into the company.
So what is it about horse breeding that makes it hard to consider it a business?
I started to really think about what was bugging me about it. And here is what I found.
**Full disclaimer, I am not an accountant but I did study Economics at University. A long time ago....**
Business: the activity of making money by producing or buying and selling goods, or providing services. Making money can also be defined as making a profit: when revenues are higher than expenses.
In most businesses, expenses are relatively set (fixed and variable cost, cost of input, cost of resources) but revenues can be harder to pinpoint. It can be hard to predict how many gizmos, doodads, or services one is ultimately going to sell. Will all inventory will be sold? Will there be a scramble to fill an unexpected demand or will the inventory sit on the shelves and depreciate?
Or it can be the opposite: you can have a contract for so many thingymajig but now you have to produce them within the parameter of the contract AND make a profit.
A big part of the hustle of running a business is to keep expenses low and to grow revues. After all, with a set amount of expenses, most savvy business owners can go about determining how much they need to sell in order to make a profit.
Now, how about a business in which both expenses and revenues are unpredictable?
This is horse breeding.
The expenses side of the equation.
How can expenses not be predictable? Surely there is a budget at the beginning of the year that is established?
Horse breeder (avoiding their accountant's stare and mumbling a bit): "Well umm.. no"
What!! How can you have a "business" with no true budget? What is this nonsense?
Let's take a look at the two categories of expenses for horse breeders: predictable and unpredictable
(Yes-I am well aware that most businesses have fixed and variable 😉 Horse breeders do too, but it's not the most important categories as you will see...)
So here we have a business that has such variable year to year costs that are completely or mostly related to chance. Sometimes, the unpredictable expenses can be as much as half (or more!) as the predictable ones.
It becomes very hard to make a budget. What will you do if you spent your budget on getting a mare pregnant and the next mare to foal has an emergency? Will you consider your budget exhausted and simply not provide care? Of course not. So do you anticipate a certain amount of bad luck? If so: how much?
Most serious breeders have done this for long enough to know where they can cut some costs. So they do their own work. Some trim their horses themselves, others do the ultrasound and inseminating on their own investing in the ultrasound machine and liquid nitrogen tank. Most also look for the most cost-efficient way to feed their herd while still providing the kind of nutrition that is necessary to raise riding horses.
But we all remain at the mercy of pure bad luck.
Here is an example.
A few years ago I had a mare deliver her third foal. She was an experienced broodmare and the foaling was textbook. (I was already grabbing the ladder-ready to step on the first rung). Easy delivery, the foal was vigorous the mare's first milk was sticky and of good quality, all looked good except... when I examined the placenta there was a tiny tear that looked suspicious. (Any retained placental membrane in the mare is extremely bad news. A piece literally the size of a quarter can lead to a raging infection that could kill her. You don't play around with this.)
The vet was called. She examined the placenta and agreed with me that the missing piece was suspicious and recommended that we flush the mare right away. And so we did. (And stepped unto the slide or the snake's head if you want). We also monitored her temperature and checked a few times daily that her feet were cool (a consequence of retained placenta is laminitis). We monitored the mare and flushed her for three days because her temperature did go up on the second day. We took care of her until we were sure that she was not going to founder and that her uterus was clean. It was the right thing to do to prevent possible complications and it was based on sound examination. The reality is that while the foaling was good it tacked on an extra $2000 in expenses for that year. (Multiple visits by the vet (once a day for three days after the initial evaluation), minimal sedation, flushes with 5-6 liters of saline every time, oxytocin...the costs can go up very quickly).
These things happen. No real way to predict them. It had been 7 years and some 20 foals since my last experience with retained placenta.
Some years I had $10,000 in unforeseen expenses, other years less than $2000.
Let's mention the other elephant in the room here: what do breeders pay themselves for the hours spent caring, doctoring, breeding, mare watch, foaling out, trailering etc...? Most of the time: absolutely nothing. So in terms of business here is an odd one: no labor costs are usually factored in or truly tallied up in the expenses collum.
The other side of the equation: Revenues.
Now, how about a business where the cost of production has almost no impact on the sale price?
That is a reality of the horse world. The cost of breeding, foaling out, feeding, and raising a foal has very little to do with the final price of the animal. Horses of all breeds (lets for this conversation eliminated the high stakes TB and QH ) cost pretty much, all the same, to be conceived, fed, and raised, and yet some breeds fetch much higher prices than others. Proof that the cost of production has little to do with the price.
Ok, so if the cost of production is not what dictates the price, then what does?
For the most part, it's the market and how the market sees your product. Riding horses are luxury goods that vacillate between being commodities and differentiated products.
What does that even mean?
Here are some definitions:
Commodity:
- noun A product or service that is indistinguishable from ones manufactured or provided by competing companies and that therefore sells primarily on the basis of price rather than quality or style.
Differentiated Goods:
- noun Goods that are either physically unique or at least viewed as unique by buyers with price reflecting rarity and perceived value. Can be quite subjective.
So not only is the horse breeder unable to set a budget for the year but it also cannot accurately predict the value for which the products might ultimately sell. Will the market consider his foals commodity or differentiated goods? It will likely vary from year to year.
Horses, notably young horses are a very interesting market. They are essentially potential mounts. Hopes and dreams. Quite different from horses started under saddle.
If the foal is exceptional, in other words, if it:
- is by top, popular, and valued stock,
- comes into the world straight and correct,
- is of similarly (high) quality as its parents,
- its (high) quality is obvious from the first day,
- it is suitably colored and marked,
- it is seen by the right people,
it will likely be considered a differentiated product and it will sell for the top tier of its market.
If not- it will sell at a commodity price because it will be in direct competition with other foals of similar value and quality all over the continent.
As a result, all breeders work really hard to make sure that their horses stand apart, and are hopefully valued more highly from the start.
The old saying: breed the best to the best and hope for the best sums it up. (I personally like to put this slight modification: breed the best that you can afford to the best that you can afford and hope for the best.)
Hope for the best, because there is no question that there is part of it that is chance, luck, serendipity.
Therefore even revenues are a bit complicated to estimate ahead of time. How much will the foals sell for this year? Hard to tell... Between $15,000 and $8,000 for most full warmblood foals in NA. The reality is that crossbred or Warmblood x TB crosses will sell for less.
That is a significant range when you think of it. Can you imagine another business in which the price of the product could really vary by that much? Let's not forget also that it is a hard reality that not all pregnancies will yield a healthy live foal.
So what do breeders do? How do you run a business when you are not sure of the cost or the revenues??
There are a few strategies.
We already saw that breeders will work hard to control their expenses at least the part that is under their control. Frustratingly being experienced does not greatly reduce the chances of getting hit by bad luck. Very experienced breeders can have mare colic while pregnant or lose both mare and foal to dystocia. That is another aspect of horse breeding I find infuriating: Mother Nature will always keep you humble ( and broke!).
On the revenue side, some breeders will fix the price of their foals. Before they are born they know that they will be putting a price tag of $ X on them. If they don't sell they are ready to hold on to them until they are under saddle and enter a completely different market: the riding horse market. Not all have the room to do this, but those that do have that option. Not sure if that helps with the "business" aspect of it, however. Growing horses keep eating, can get hurt, and lose value very quickly that way.
Some breeders will price the foals according to what it looks like once it is born letting the price reflect the quality of the animal they have to market.
Some will put a floor price on them and will be happy to sell them at that price even if they know they might have sold for a bit more if they are very nice.
And there are a few others. Some like to sell in-utero for example.
The point remains that the final revenues for the year CANNOT be predicted with any accuracy.
And all this is very subjective hence it leads to people saying "I can't believe they are asking this much for that foal!"
The reality is that the foal will sell for what the market will bear. There is no right or wrong answer for the price of the foal offered for sale.
Some are overpriced, some are underpriced, some are probably correctly priced but can't seem to catch the right buyer's eye. But I can tell you that the majority of foals or yearlings or two years old very few sell at cost and even fewer sell with profit.
Snake and Ladders
And so the business model for a horse breeder is that of a game of snakes and ladders. Everyone has a different budget but everyone rolls the dice and where that lands them can be at the foot of a ladder (a stunning foal, full of potential, attractive and gifted sells quickly to the right home: take the ladder up!) or on the head of a snake (one of your mares takes 4 cycles to conceive this year- slide down two levels and start again) and so on year after year.
A few years of profit can be wiped out by one bad one.
How can horse breeding truly be a business with such challenges?
I can only think of two ways:
- Make it a subset of a larger business that can absorb it's ups and downs easily (You know: How to make a small fortune in horse breeding? Start with a large fortune.)
- Treat your horses like livestock- that is how the livestock farmers do it after all. I'm not sure that would appeal to many of us, however.
If you have other strategies I would be happy to hear them! Drop me a line.
