I'm so depressed by the results of Tuesday's yearling sale at Barretts that I haven't been able to study them with any care. When I recover enough to look at them, I'll probably have something to say.
     It does appear clear, though, that there was insufficient demand for the horses offered. There weren't enough buyers willing to pay what it would have taken to make the sale a success.
     Looking at that situation, a question formed in my mind.
     If there is insufficient demand for a product, you have, by definition, an oversupply. More product than the market can absorb. So here's the question:
     Which is more likely to correct that imbalance, subsidizing buyers or subsidizing producers?
     Think about that. 
     I'll come back to this later.

     Let's review the basic question: If the supply of a product exceeds the demand for that product, should incentives be applied to the supply side or the demand side. Which do you want more of, supply or demand?
     The purpose--the definition--of an incentive is to increase something, in this case either supply or demand.
     For a long while, production by California Thoroughbred breeders has exceeded demand. They are producing a considerable number of horses for which there is no demand at all.
     They are also producing a great number of horses for which there is no demand at prices that exceed the cost of producing those horses.
     Correcting the market imbalance requires reducing supply, increasing demand, or both. Increasing supply will aggravate the problem.
     The California Incentive Awards Program offers millions of dollars annually both on the supply side and on the demand side.
     At present the breeding industry badly needs greater demand and less supply.
     In 2006, that incentive program (administered by the CTBA) provided $8.02 million to California breeders--incentives toward greater supply--and $1.7 million to owners of California-bred racehorses--incentives toward greater demand. 
     (And the $1.7 million didn't all come from the incentive fund; some of it came from the owners themselves).
     To increase supply: $8.02 million. 
     To increase demand: less than $1.7 million.

     In 2006, the California Incentive Award Program distributed approximately $12,400,000 to breeders, stallion owners, and racehorse owners.
     Combining awards to breeders and stallion owners, that's approximately $10,700,000 to encourage production and $1,700,000 to encourage consumption. 
     Owner premiums are paid to winners of non-restricted allowance races and upper-level claiming races, but not stakes races. No premiums are paid for winning restricted races, including those restricted to California-breds.
     Stallion awards are paid for winning races at the same levels, but they are paid on restricted races. They are paid for first-, second-, and third-place finishes in all stakes races.
     Breeder awards are paid to the first three finishers in all races run in California.
     The section of California law authorizing the incentive program states that the payments are to be made "so as to encourage agriculture and the breeding of higher quality horses in this state."
     That means that the breeder of a horse that finishes third in the lowest level race at Ferndale, for example, receives an award authorized for the purpose of breeding higher quality horses.
     I once asked a member of the CTBA board of directors how paying an award to the breeder of the third-place finisher in such a low-level race encouraged the breeding of higher-quality horses.
     He explained without hesitation that since the third-place finisher beat some other horses, he was a higher-quality horse than they were.
     The market for California-breds is badly out of joint. Supply far exceeds demand, and there is no demand at all for the kind of horse that runs at any level at Ferndale, even the winners.
     As it is presently constituted, the incentive program encourages the breeding of horses at all levels, not just the levels at which horses have value--and there aren't many of those.
     The search for a solution to the problem of lack of demand for most of the horses California breeders are producing has to begin with an examination of the California Incentive Awards Program.
     There's enough money there to make a difference, but it's going to the wrong people.

     Seven years ago, the CTBA paid $17,000 to Cal Poly San Luis Obispo researchers for a study that the lead editorial in the association's magazine, California Thoroughbred, said "confirms our belief that the current California-bred program is successful in promoting and retaining quality bloodstock in the state."
     One of the key questions that the researchers asked breeders was what they did with money they received from breeder awards. They answered that they used the money to upgrade their breeding stock.
     Even the most dim-witted breeders must have realized that any other answer might endanger their breeder awards, so they gave the predictable response.
     But Cal Poly also reported that in answer to a separate question, 70 percent of the breeders surveyed said--quoting from the report--they "replenished their broodmare holdings with 'their own foals or retained race mares.'" With the exception of a tiny handful of successful owner/breeders, that's a certain recipe for a broodmare band of steadily diminishing quality.
     The Cal Poly people reported that, without flinching, even though the answers were clearly incompatible. One set of answers or the other just wasn't true.
     And most breeders told the questioners that they would either cut back on their operations or get out of the business entirely if breeder awards were eliminated.
     Reading between the lines and between the questions, one would pretty much have to conclude that breeders use breeder awards to pay bills. 
     You'd also have to conclude that if breeder awards are the only thing keeping a breeder in business, he can't be producing horses of the "higher quality" that state law says is the goal of the incentive awards program, of which breeder awards are the major part.
     In the two yearling sales held in California so far this year, 38 horses left the ring without a bid and 78 others drew bids no higher than $2,000. That's 116 of the 519 yearlings offered for sale--22.4 percent.
     Most of the 116--90 of them, including 35 no-bids--went through the ring at the Northern California sale at Pleasanton, but 26 others went through the ring at the October sale at Barretts, an auction cataloging the state's best yearlings.
     Still to come is the Barretts mixed sale later this month, with 119 yearlings of lesser quality. It's a near-certainty that many, if not most, will have trouble finding buyers.
     There can be no question that California breeders are producing many horses that California owners and trainers do not believe are good enough to race in this state. And there can be no question that breeder awards are encouraging breeders to produce and continue producing foals that are neither required nor desired by California racehorse owners.
     That being the case, the obvious solution--the obvious solution--would be for breeders to find buyers who race in places where those horses could be competitive.
     Many of them could win races in other states, and many of them could find willing buyers from other countries as well. Among buyers at Keeneland and Ocala are a number from Pacific nations such as Korea, The Philippines, and India as well as from our next-door neighbor, Mexico.
     Surely buyers from those Pacific nations would prefer to buy in California rather than Kentucky and save the cost of shipping across the country before departing for their Far Eastern destinations. And Mexican buyers certainly would rather buy in close-by California.
     It's the responsibility of the California Thoroughbred Breeders Association to defend and promote the interests of the state's breeders, and that certainly should include making an aggressive effort to sell their produce to people who want to buy them.
     But at the October sale at Barretts, only 23 of the 282 yearlings offered were purchased by buyers from outside the state. Eight went to five buyers from Utah, six to a buyer from Mexico, and nine others to buyers from Great Britain, British Columbia, Arizona, Florida, New Mexico, and Texas.
     But only the buyer from Mexico wanted those bottom-level Cal-breds. The average price of his six purchases was $2,833; the other 17 averaged $13,529, demonstrating that there's an out-of-state market for better horses, too. 
     Still, the lesson is clear: Market those cheap horses to non-American buyers.
     Why doesn't the CTBA do that?
     CTBA general manager Doug Burge answered the question in this succinct statement: "Breeders want their Cal-breds competing in state so that they still have their 15% investment (breeder awards) without any future bills. We do not advertise in foreign countries." 
     There you have it: breeder awards enable breeders to produce horses unable to compete in California, but they want those horses to stay in California to earn breeder awards.
     So . . .
     Breeder awards enable breeders to produce unmarketable foals.
     Breeder awards cause breeders to oppose efforts to make those foals marketable.
     Breeders welcome the prices that the more desirable horses bring when outside money enters the market, and they would welcome even higher prices that could come from additional foreign purchasers, who buy not only at the bottom but at higher levels as well.
     But they want the horses to stay in California so they'll get those breeder awards.
     Breeder awards interfere with the free operation of the market, and, under the present Cal-bred program, that brings unfortunate consequences for all breeders who want to sell the foals they produce.
     Subsidies can interfere beneficially if they're applied wisely. Under the program in place now, they aren't.

     When the California Incentive Awards Program was created more than half a century ago, its purpose was to help the state's fledgling Thoroughbred breeding industry survive and then grow.
     The vehicle for fostering that growth was the breeder award, a subsidy that gave financial assistance to breeders of registered California-bred foals.
     The industry not only survived, it thrived, and the number of Thoroughbred mares bred reached an all-time high of more than 10,000 by the mid-1980's. Now that total is about 5,000 and the state's breeding industry is again in crisis.
     But this crisis is of a different kind--overproduction. Or, at least, production of too many foals for which there is little or no demand.
     Though supply now far exceeds demand, the incentive program continues to subsidize production. As is almost always the case with governmental subsidy programs, the subsidies have continued long after the need for them has disappeared.
     In 2006, the state incentive program provided $10,700,000 to suppliers--mare and stallion owners--and less than $1,700,000 to consumers, making the problem worse, not better.
     If more than $12,000,000 is to be inserted into the market, is there any doubt about where it should go--to increase supply or to increase demand? Do breeders need help in producing more foals or do they need help in selling the ones they're producing?
     That question is answered unequivocally by the results of sales in recent years. Although those subsidies remain in place, more and more breeders are dropping out in the face of crushingly low demand for the foals they're producing.
     The answer is obvious: Move the subsidies from supply to demand.
     If $12,000,000 were added each year to purses for races restricted to California-breds, buyers would be fighting for the opportunity to own those horses. And their weapons for combat would be higher bids.
     To have the desired effect, all the money would need to go into purses for Cal-bred races, where its impact would be dramatic. That impact would be lost if the incentive money were distributed over other races on the program as owner premiums. 
     With that much money allocated to Cal-bred purses, every stable would want a contingent of Cal-breds to compete for them. Imagine a California-bred maiden race carrying a purse of $100,000 or more, for example. And those Cal-bred allowance races that never seem to fill, would be overflowing with horses competing for six-figure purses.
     The effect on the sale prices of Cal-breds is obvious. Up, up, and up.
     That Cal Poly study reported that 70 percent of breeders said that they race. They would be right there competing for those big purses along with everybody else, with the possibility of winning far more than they'd ever hoped to get in breeder awards.
     And if they weren't already doing it, they'd soon start breeding better racehorses to have a better shot at those purses.
     In addition, the roadblock that has kept the CTBA from marketing Cal-breds outside the state would be removed. There'd be no breeder awards to lose if Cal-breds got shipped out of state.
     State law would have to be changed to make that switch from subsidizing supply to subsidizing demand, but if the major entities in the industry worked together, there'd be no problem with getting legislation passed.
     The CTBA has always been the guard dog, fiercely defending the Incentive Awards Program and permitting changes only reluctantly. If it agreed to the change, nothing would stand in its way.
     Owners, represented by Thoroughbred Owners of California, would enthusiastically welcome such an infusion of money into purses. Racetracks, seeing the near certainty of full fields for those Cal-bred races, would be all in favor, too.
     There's no predicting what position the CTBA would take. It certainly could block any change in the law if it wanted to. Legislators almost never change racing laws if there's significant opposition within the industry; opposition by the CTBA would surely kill any bill.
     The CTBA's choice would be between a stagnant, shrinking breeding industry and the possibility of a vibrant, thriving one. Of course, the CTBA may not see it that way. That would be a tragedy.
     If may be that the CTBA would want to compromise and move some but not all breeder award money into purses. That would likely do more harm than good, reducing assistance to breeders without giving owners sufficient incentive to dramatically increase their desire to own Cal-breds.
     The old saying sums it up: Anything that's worth doing is worth doing well.
     And this is surely worth doing. Now, while there are still some breeders left.