Measures of confidence

With both prize-money and yearling investment at historic highs in Australia, we take a look at the relationship between the two over time.

For those operating thoroughbred racing across Australia, the current health of the industry has been written in the balance sheets, with the doubling of prize-money since 2010.

On the back of soaring wagering turnover, plus competition between major racing jurisdictions, returns to owners have increased by more than $400 million in that time, imbuing investors with confidence as they seek to replenish their racing stock through the yearling sales.

This has then led to a surge in bloodstock investment, with the volume of money spent through Australia’s yearling sales doubling since the 2014/15 season, adding another $300 million to vendors’ pockets on an annual basis.

While the 2023 sales season has resulted in a slight drop in investment, and Victoria has confirmed a small drop in prize-money for the upcoming season, put in a historical context, those involved in the business of racing have rarely had it better.

Prize-money is an incentive measure, which charts the possible returns to investors, while yearling spend measures the confidence of those investors in getting their money back. A look at a graph of those metrics over time shows this correlation, albeit yearling sales tend to be more volatile. The economic flow of the industry, where prize-money incentivises yearling investment, indicates that there is a causal link between the two.

Hence, the comparison of the two data points can give a measure of investor confidence over time and help us track when there has been value in the yearling market.

Racing Australia has published these two data points over time, dating back to 1995/96, which allows us to undertake an historical comparison, looking at the ratio of yearling investment to prize-money.  

The 2021/22 season is the most recent set of data available, with $848 million in prize-money on offer and $642 million spent on yearlings in Australia. That gives us a ratio of yearling sales to prize-money of 0.756.

That is the highest that ratio has been since 2007/08, which is a clear indication that the opportunity for value in the Australian yearling market has fallen despite those record prize-money hikes in recent years.

Nine years ago, that ratio was 0.539, with yearling investors spending $276 million in a 2013/14 season where $512 million was paid out.

The early pandemic period also offered opportunities for investors who could see their way through the global uncertainty. Investment in the 2020 yearling season fell eight per cent on 2019, the biggest single year drop since 2009. There was $731 million in prize-money handed out in 2019/20, meaning the ratio of investment to returns was 0.581, which was the lowest on that metric since 2013/14.

The data tells us that the best time to invest in the Australian yearling market this century was in the five-year period following the global financial crisis (GFC) in 2007/08. The average price of an Australian yearling in 2007, pre-GFC, was $75,853, and it didn’t get back above that until nine years later!

The value ratio in 2007/08, prior to the financial meltdown, was at a historically high 1.048, as one of only two racing seasons in recent history where yearling investment outpaced prize-money. It is worth noting that ratio was impacted by the fact real prize-money returns fell by some $20 million in that season as equine influenza (EI) resulted in the number of races run drop from 19,545 to 17,211.

The racing industry’s response to the twin threats of GFC and EI was to bolster prize-money in 2008/09, which was $66 million higher. However, yearling investment fell 34 per cent, or some $128 million. From that high of 1.048, the value ratio dropped spectacularly to 0.581 in the space of one season.

The ratio would average out as 0.56 over the next six seasons, as investment lagged below pre GFC levels, while prize-money continued to rise after the landmark race fields case led to a surge in funding from 2012 onwards.

You only have to look at the prize-money totals of leading trainers over that period to see how things have evolved. In 2008/09, David Hayes was Australia’s champion trainer (by winners) and his horses earned $4.6 million. Five years later in 2013/14, Chris Waller won top honours and his horses’ prize-money haul was just short of $7 million. In 2018/19, Waller’s total prize-money was $16.2 million, while this year, it will surpass $45 million. That’s a ten-fold increase in the space of 15 years.

The bloodstock bubble which led up to the GFC crash is easy to chart when we look at the ratio of yearling investment to prize-money. In 2002/03, investment was just 0.527 of returns but that jumped to 0.681 the following season as the yearling market surged by 20.9 per cent.

In 2003/04, the value ratio jumped again to 0.735 and then to 0.836 the following season. In 2006/07, for the very first time, investment in yearling sales eclipsed prize-money, and it stayed above that mark the following season.

In that five-year window from 2002/03 to 2007/08, yearling investment in Australia grew by 124 per cent, while prize-money only rose 12.4 per cent. Regardless of what was going on with global finance and equine influenza, that growth could not have been sustainable.

Looking back to the 1990s, we see there was ample value on offer. In 1995/96, the first season of data we have, there was $234 million in prize-money paid out, but just $83.8 million spent at yearling sales. That puts the value ratio at 0.358.

The yearling market evolved quickly in that period with the growth in quality on the supply side and quantity on the demand side. The investment of global players in Australia in this period, particularly when it came to shuttle stallions, increased both the quality of stock and the commercial opportunities for breeders and vendors, while the burgeoning syndication model swelled numbers on the buyers’ bench.

By the turn of the century, total yearling investment had doubled in the space of five years, during which period prize-money would only increase 25 per cent. However, that lag did not seem to disincentivise investors who continued to add more into the yearling market to the point that the average price of an Australian yearling grew from $20,825 in 1996 to $75,823 in 2008.  

Note: By The Numbers will be published weekly on Mondays through July, but will resume its thrice-weekly publishing cycle in August.