Brexit, exchange rates, COVID

FOR ONCE IT seems most unlikely that European bloodstock sales in 2021 will resemble those of the previous year.

COVID-19 will continue to disrupt the movement of people and horses, but now there is a vaccination programme underway throughout Europe there are reasons to hope the virus’s stranglehold on racing, breeding and everything else in life will be relaxed during the year.

And in any event COVID is, unfortunately, can now be called “a known unknown”. The unknown unknown for the 2021 sales season is the full effect Brexit will have on the movement of horses between Britain and the EU.

At the time of writing nobody appears to be sure what the new regulations will entail.

The UK government’s own website is far from clear on the subject and the British Horseracing Authority’s advice echoes this lack of clarity.

The UK government states that before permanent or temporary export or movement of an equine from Britain to the EU various requirements will have to be met including, “you’ll need to keep the animal separate from other equines which do not have equivalent health status for at least 30 days” and “you’ll also need to keep the animal on a holding in GB under veterinary supervision for 90 days” and finally “an official vet must confirm that you’ve met these requirements before you export the equine.” So we all know where we are then.

Does this mean, for instance, that a horse purchased at a British auction will have to be held in GB on a holding for 30 or 90 days before being moved to the EU?

Will British-trained runners in France or Ireland have to be kept on a special holding for 90 days prior to movement ?

These and many others questions will have to be resolved, along, of course, with the problem posed by VAT requirements for equine imports and exports from Britain.

It would seem that in the best-case scenario horse movement between Britain and the EU will now be more timeconsuming and expensive than it was previously, and in the worst case, with VAT bonds required, as well as 30, 40 or 90 days quarantine required, it will become next to infeasible on a temporary basis.

The worst case, if it turns out to be reality, will, of course, have a dramatic impact on the European bloodstock and racing business, which has become entirely accustomed to seamless movement of horses between Ireland, Britain, France and the rest of Europe.

The Brexit transition period which lasted from the referendum held in 2016 to the end of 2020 was, on the other hand, very positive for the high-level bloodstock sales held in Britain.

During this period the movement of horses and people was unchanged, whilst within minutes of the result of the referendum being announced sterling lost 25 per cent of its value against the US dollar, the Japanese yen, the Euro and most other major international currencies (graphs left).

Few of the major players at high-level yearling auctions are reckoning in sterling and so a 25 per cent depreciation in the pound translated into a big drop in prices paid by those who make the market.

The graph showing turnover at the combined Tattersalls October Book 1 and 2 Yearling Sales (graphs right) in current US dollar prices shows that 2016 was the lowest recorded aggregate in recent years.

It takes time for buyers to appreciate a change in the terms of trade, but in 2017, 2018 and 2019 the market returned to the level attained before the Brexit vote.

In sterling terms the story is a different one with the market more or less the same in 2014, 2015 and 2016 before rising significantly for 2017, 2018 and 2019. The difference is the change in the terms of trade for those buyers reckoning in currencies other than sterling.

The effect of currency movements on the bloodstock market is generally underappreciated, but it is an international business, and at most of the international European bloodstock auctions the major buyers are reckoning in a different currency to that in which they are bidding.

The year 2007 is included in the graphs showing turnover in dollar terms as it was the peak year of the previous cycle before the financial crisis of 2008 changed the market.

The European yearling market has yet to return to the same level in dollar terms, and in the mean time the pound has lost 40 per cent of its value measured against the dollar.

In October 2007, £1= $2.1 but by October 2020 £1 = $1.3.

The Euro has lost about 15 per cent of its value against the dollar during this period, but has actually gained value against the dollar since 2016.

To return to the Tattersalls yearling sales as long as the movement of horses between Britain and Ireland remains relatively straightforward there is no reason why the firm should not maintain its dominant position accounting for between 55-60 per cent of the European market.

The new US buyers and the success of their purchases in the US has added to the sales’ standing and there is little prospect of sterling regaining its pre-2016 value against the dollar in the short to medium term.

The Maktoum family has accounted for at least 20 per cent of the turnover at the major European yearling sales every year for more or less as long as any of those involved can remember. This alone ensures Tattersalls’ dominant position.

The other stallion owners are, of course, obliged to support the progeny of their stallions in the dominant market, if that is where future values are decided. There will come a day when the Maktoum family does not determine the market.

When that happens the position of Tattersalls may come under threat, but if it looked for a time as if 2020 was going to be the turning point, by the end of last year’s Tattersalls October sales it was clear the moment of reckoning was still in the future.

For Goffs and its vendors 2020 must have felt like that moment as turnover at the Goffs Orby Sale – moved to Doncaster due to COVID restrictions – and at the Doncaster Premier Sale both fell by around 40 per cent.

Looking at the long-term comparison Goffs’ principal Irish yearling sale has seen its share of the European market fall from 20 per cent in 2007 to closer to 10 per cent in 2020.

In 2007, the two sales were, of course, entirely separate, but there has been a long-term decline at the premier Doncaster yearling sale too.

The factors which drove the success of the Goffs Irish yearling sales at the beginning of the century have gone; the property and credit booms brought to an abrupt end by the financial crisis. The years from 2016- 2019 were good ones for the sale which looked to be on an upward curve with new buyers from the Middle East and the US present and a resurgent domestic market. Neither of these positives could be transferred to Doncaster under the COVID restrictions.

The problem for Goffs is not just how to attract international buyers when the terms of trade are so favourable for Britain, but its supply, too. Irish vendors account for close to half of the yearlings on offer at the major sales in Britain and are also well represented at Arqana.

There is every reason to expect the Orby yearling sale to rebound if it takes place in a COVID-free Ireland in 2021. There has recently been plenty of inward investment from the US and elsewhere in the Irish bloodstock business and there must be a possibility this will help build domestic demand in Ireland.

If a weak currency is the best sales argument for Britain, in Ireland, as in France, it is the place and the setting which counts, together with the domestic market.

The problem for Doncaster and its Premier Sale is that the currency argument is not relevant for its market.

The sale was built-up with great success around a specialisation in fast precocious horses, and yet this type of yearling has everless international appeal.

If the domestic market is depressed than it is inevitable that demand at the Premier Sale will be, too. It may be that Doncaster will have to rethink its brand and its selection criteria if it is to grow after COVID.

The virus has changed many commercial priorities and in the bloodstock world reduced prize-money and access to racecourses has made potential resale values more important than ever.

Arqana has succeeded, with plenty of assistance from Siyouni, Le Havre, Wootton Bassett and the PMU among others, in growing the turnover at its yearling sales.

Turnover at the usual August sales comes Aclose to matching in real terms where it was before the financial crisis of 2008, while turnover at the October yearling sale has more or less doubled.

Nobody can doubt that in financial terms France has the best racing system in Europe and the success of the PMU, likely in the long run to be boosted by COVID which has meant the group has speeded up a long overdue growth in digital betting, suggests that in France domestic demand is set to grow in the short to medium term.

The problem with the French system is that success of its prize-money and premiums is such that French-bred yearlings are more attractive to those who wish to race in France than to those who plan to race elsewhere. The change in the terms of trade with Britain has not helped in this respect.

A second-related problem is that the major European stallion owners – Darley, Shadwell, Juddmonte and Coolmore – appear to have less interest in French racing, and fewer racehorses based there than was the case in the past.

It seems a very long time ago that Godolphin was based in France and that many of Juddmonte’s best racehorses were trained in Chantilly.

Arqana is in a stronger position than Goffs. The system in France ensures a strong domestic market, and thanks to some degree to its premiums, only a handful of Frenchbred yearlings are sent to be sold abroad.

For the time being Haras des Monceaux, whose draft accounts for somewhere between 25-33 per cent of most August Sales, has remained entirely loyal to its domestic market.

If Arqana is to compete successfully at the very top of the yearling market it needs to attract international buyers and those who are not interested in racing in France. This is surely why the sales company has decided to return to an August date for its principal yearling sale.

Deauville in September proved to be an excellent environment for a yearling sale, the weather is invariably better than in August, the town empties out after “la rentrée”, and without racing the French trainers and professionals can concentrate on the sale.

However, the buyers from Asia, the US, Australia and elsewhere that the sale needs are far more likely to make the trip in August when the town is buzzing and there is topclass racing to watch, too.

It may seem far away in early January with relentless bad news around us, but there is every reason to expect the European and British economies to rebound sharply in 2021.

Leading economic forecasters predict growth of around five per cent over the year, and if the bloodstock market showed remarkable resilience during the COVID year it could well be prone to a post-COIVD exuberance in 2021, too.

The bloodstock market in the early 1920s probably has little relevance to today’s market. It was centered on the sales in Doncaster, however after the Spanish influenza pandemic there were some boom years and significant new investors such as the Aga Khan, even if the years of deflation disguise this in the figures. There was incidentally plenty of horse movement across the Channel at the time with the British-trained Lemonora winning the Grand Prix de Paris in 1921 and Pierre Wertheimer’s Epinard taking Goodwood by storm in 1923.

After months without being able to go racing or travel many potential buyers may be more enthusiastic than ever.

And the switch to digital enjoyment of racing may encourage international investment in racing in each of the three main European breeding countries for different reasons.

So as long a reasonable solution to the movement of horses can be found there is every reason to expect the 2021 bloodstock sales to be better than those of 2020.