Call to Order and Roll Call
The1st meeting of the Subcommittee on Horse Farming of the Interim Joint Committee on Agriculture was held on Wednesday, November 10, 2010, at 10:00 AM, in Room 129 of the Capitol Annex. Representative Susan Westrom, Chair, called the meeting to order, and the secretary called the roll.
Guests: Jamie Eads and Marc Guilfoil, Kentucky Horse Racing Commission; Richard Wilcke and Norm Luba, Kentucky Quarter Horse Association; David Switzer, Kentucky Thoroughbred Association; Robert Feenick, PBI Bank, Lexington.
Thoroughbred Industry Discussion
The presiding co-chair, Representative Westrom, called on the first speakers, Mr. David Switzer, Executive Director of the Kentucky Thoroughbred Association-Kentucky Thoroughbred Owners and Breeders, and Mr. Robert A. Feenick, Senior Vice President, PBI Bank, Lexington, for a discussion on the impact of the current economic downturn on Thoroughbred breeding operations.
Beginning first, Mr. Switzer described the current downturn in the Thoroughbred industry beginning in the 2007 sales year and continuing to the present time. He characterized the recession as worldwide in scope and one that has severely impacted the industry. Mr. Switzer noted that in 2007, banks in the region had an estimated billion dollar loan portfolio; this year, the portfolio has dropped to the $300-$400 million range.
According to Mr. Switzer’s testimony, banks have markedly curtailed their lending to Thoroughbred operations. There is no encouragement for banks to lend to a risk-based business such as equine operations, according to his testimony. Banks also are requiring horse operations to have a second source of cash flow in addition to the horse business.
Mr. Switzer indicated they needed to find ways to encourage banks to lend money to horse farm operations.
Speaking next, Mr. Feenick described to the subcommittee how he had tracked the Thoroughbred industry for several years. He indicated the industry has experienced its ups and downs throughout the years, with a downturn seen in the mid 1980s and the current economic difficulties.
Mr. Feenick described how the industry works, pointing out that, central to the industry are the stallion stud services available at central Kentucky breeding farms. Most of the industry is driven by “mom and pop people.” Using a chart to amplify his remarks, he showed the subcommittee how the return on stud fees has ebbed and flowed through the years. The return peaked in 1998 and has been declining gradually since.
Turning to the role of banks in the industry, he said his customers go through elongated cycles of profit and loss, but banks look at profit and loss in terms of 12-month periods. The $300-$400 million in outstanding loans in the central Kentucky area represent a “drop in the bucket” for “trillion dollar banks.”
Given the current economic climate, Mr. Feenick indicated he is attempting to work his customers down to shorter lines of credit.
Responding to Representative Montell, Mr. Feenick said his bank has committed $50 million in loans to the industry at this time and currently stands at $30 million. Answering a question later from Representative Adams, Mr. Feenick said some of the business is new, while another part involves customers moving their business from other banks.
Mr. Switzer responded to another question, noting that smaller banks are being urged to take on the business, but most are taking a conservative approach at this time.
Responding to Co-chair Westrom, who asked about the status of the business in other states, Mr. Feenick said Kentucky is blessed that it has an established presence in the business, although there is considerable competition from states with “casino-driven purses.”
Asked about foreclosure procedures on horse farms, both speakers described how banks try to delay foreclosures. Mr. Switzer cited the costs of keeping a horse farm operating throughout foreclosure and dispersing horses and other assets, a costly and time-consuming effort.
Responding to Senator Thayer about the industry “squeezing itself out,” Mr. Feenick pointed out margins of profitability for horse farms were declining even before the current economic downturn. Good markets resulted in over-production, according to his testimony.
As discussion continued about the horse market generally, Mr. Switzer responded to Senator Thayer that supply and demand “will take care of itself” and that mares that should not go to the market will not be bred.
Commenting further, Mr. Switzer agreed with Senator Thayer that the world market for Kentucky-bred horses remains active.
Asked about scenarios in which banks cease doing business with horse farms that have made their payments, Mr. Feenick indicated those instances do occur now as they did in the late 1980s. They do not want to force people out of the business; they want to help them.
Breeder’s Incentive Fund Report
The subcommittee received a report from Ms. Jamie Eads, Director of Incentives and Development for the Kentucky Horse Racing Commission, who reported on the Kentucky Breeders Incentive Program, including the Thoroughbred fund, the standardbred fund, and the horse breeders (non-race) fund.
According to Ms. Eads’ Thoroughbred report, total funds awarded in 2007 and 2008 respectively totaled $15,487,262 and $15,253,911, but in 2009, the amount declined to $13,409,571. She suggested the fund will continue the decline this year. The number of registered stallions is down about 10 percent, a loss of about 32 stallions. Revenues for the fund come from sales and use taxes on the fees paid for breeding a stallion to a mare in Kentucky.
Ms. Eads told the subcommittee that her office has formed a committee to look at breeding trends in Kentucky and will be doing some outreach to determine what breeders want from the program. She said they distribute materials at sales events in an attempt to reach out to horse farms.
Turning to the standardbred fund, she noted that the number of pacing stallions standing in the state was down 46 percent in 2010 compared to 2009 and the number of trotting stallions was down 14 percent. All the moneys coming into the standardbred fund are awarded in the Kentucky Sire Stakes races at the Red Mile in September.
Finally, Ms. Eads discussed the horse breeders (non-race) fund. Two new breeding groups are participating in that fund – the Kentucky Miniature Horse Breeders Club and the Kentucky Arabian and Half Arabian Breeders Alliance.
Finishing her report, Ms. Eads responded to Representative Overly that standardbred stallions are being moved from Kentucky to other states. According to Ms. Eads, some Thoroughbred stallions have been moved to Indiana and Pennsylvania because of the additional revenues being put into those states’ breeders’ incentive funds.
The presiding co-chair, Senator Thayer, pointed out that the standardbred industry in Kentucky has been in decline for several years. He also mentioned a “compelling statistic” that a large percentage of the thoroughbreds win in non-Kentucky races.
Co-chair Thayer also complimented Ms. Eads on this work that her office is doing in administering the program.
Quarter Horse Industry Update
The subcommittee received a report from Mr. Norm Luba, Chair, Kentucky Quarter Horse Association Breeders Incentive Fund, and Mr. Richard Wilcke, President, KQHA, with the Kentucky Quarter Horse Association.
Mr. Luba opened the discussion, telling the subcommittee that there are 37,590 registered quarter horses in Kentucky, more than any other breed. The KQHA is the official quarter horse affiliate in the state.
Mr. Luba said the goals of the KQHA’s breeders incentive fund is to promote economic activity in Kentucky, avoid any hint of “welfare checks” for horse owners, and seek to improve the market for Kentucky-breds. According to his testimony, they have encouraged demand for the breed, which, in turn, would enhance market prices and induce supply responses. He indicated that, while number of quarter horse stallions standing in Kentucky is down to 142 in 2010 compared to 2009, nevertheless, the number is up from 98 standing in the base year of 2006.
Mr. Wilcke discussed the status of quarter horse racing. He noted that quarter horse racing is a significant sport in other parts of the United States. But the sport ceased in Kentucky, mainly because there is no opportunities for the sport to accumulate a purse account via simulcasting. Also, quarter horse racing in Kentucky does not share in watering on the TVG Network, even on wagers made by Kentucky viewers.
Following Mr. Wilcke’s discussion, Co-chair Thayer mentioned the possibility of legislation to establish a purse system for money bet on simulcast races and on TVG. Mr. Wilcke agreed there should be a way to accomplish that goal. Senator Thayer pointed out that if the purses are available, quarter horse races would once again be run in Kentucky.
Responding to Representative Adams, Mr. Luba indicated that attendance at the American Quarter Horse Congress this year in Ohio was stable.
Representative Osborne commended the association in its use of the breeders incentive funds, noting its work is a good example of creating benefits with the funds. He said there is another non-race breed that has utilized its funds in a poor manner.
Mr. Luba responded to Co-chair Thayer that the Kentucky Futurity was moved from the Kentucky Horse Park to the city of Liberty this year because the Horse Park had limited dates and facilities to use. Senator Thayer encouraged a move back to the Horse Park in the future.
Documents distributed during the subcommittee meeting are available with meeting materials in the LRC Library.
The meeting adjourned at approximately noon.