A Hedonic Price Analysis of Thoroughbred Broodmare Characteristics

A Hedonic Price Analysis of Thoroughbred Broodmare Characteristics J. Shannon Neibergs Department of Equine Business, College of Business and Public Affairs, University of Louisville, Louisville, KY 40292 ABSTRACT Thoroughbred broodmares are the primary input in the foal production process. Breeders need to make informed broodmare investment decisions, since substantial financial and genetic risks are associated with overvaluing a broodmare s productive capacity. Each broodmare represents a unique combination of breeding, racing, and genetic characteristics. This study estimates the marginal values of broodmare characteristics. Results identify large price differentials for broodmares that have won or produced graded stakes race winners. The analysis provides information for marketing, accounting and management decisions. [EconLit Citation: Q130]. 2001 John Wiley & Sons, Inc. INTRODUCTION Thoroughbred broodmares are a capital input in the foal production process. In most managed animal populations the sire is of premier importance, because of its influence on the breed s gene pool, which is enhanced through artificial insemination and embryo transfer biotechnology. The Thoroughbred industry is unique, because registration requirements prohibit artificial reproduction biotechnology, and the value of a breeding animal is relative to its offsprings expected success at winning horse races. Biotechnology restrictions, a long generation interval, 1 and the large capital investment associated with Thoroughbred production place an added emphasis on broodmare breeding management decisions. Broodmares have a well-established, but complex market. Each broodmare represents a unique combination of breeding, racing, and genetic characteristics, which result in a wide variation in broodmare quality. A broodmare can be viewed as a production input consisting of a collection of characteristics that are deemed desirable or undesirable. These characteristics are not explicitly traded on the markets so there are no directly observed prices for them. However, the quantity and quality of each characteristic contributes to the value of the broodmare. Thus, each characteristic has an implicit price and associated marginal value. Hedonic analysis is a standard technique of applied econometrics for modeling differentiated products. A hedonic price function relates the observed price of a 1 A generation interval is the age of the parents at the birth of their average offspring. The average generation interval in Thoroughbreds is about 10 years (Gaffney & Cunningham, 1988). Agribusiness, Vol. 17 (2) 299 314 (2001) 2001 John Wiley & Sons, Inc. 299

300 NEIBERGS differentiated good to the bundle of characteristics of which the good is composed. The derivatives of the price function with respect to the characteristics are their marginal values. The objective of this research is to establish the set of broodmare characteristics important to price and to estimate a hedonic price function to determine the marginal value of the characteristics. The framework developed in this analysis provides the means to understand the Thoroughbred broodmare market in depth and to conditionally predict characteristic values. This would provide breeders an additional tool by which broodmares could be valued for marketing, accounting, and management decisions. BACKGROUND Theoretical models for understanding markets for differentiated products have built on work by Lancaster (1966), Griliches (1968), and Rosen (1974). The empirical estimation of hedonic price functions has been widely applied to a variety of agricultural commodity markets based on the framework developed by Ladd and colleagues (Ladd & Suvannunt, 1976; Ladd & Martin, 1976). The general theory of hedonic prices has developed along two related lines. The first considers product characteristics to be utility-providing attributes in a consumer s maximization problem. The second approach views product characteristics as inputs in a production process. A differentiated product, such as a broodmare, is demanded by breeders because of the particular characteristics it possesses. Either case, utility or profit maximization, yields a hedonic price function that expresses price as a function of the quality and quantity of characteristics associated with the product (Schroeder, Espinosa, & Goodwin, 1992). Currently there is not a systematic method of valuing alternative broodmares. Breeders could use this information to produce broodmares or purchase broodmare replacements with relatively high levels of heritable characteristics that are correlated with exceptional performance, improved quality, and higher profits. 2 Breeders need to make informed broodmare investment decisions, since substantial financial and genetic risks are associated with overvaluing broodmare productive capacity. Several studies have examined the value of breeding livestock characteristics based on the neoclassical input characteristics model of Ladd and Martin (1976). Dairy bull traits were evaluated by Richards and Jeffrey (1996) and Schroeder et al. (1992). Implicit values of swine boar attributes were estimated by Walburger and Foster (1994). Purebred beef bull price determinants were estimated by Dhuyvetter, Schroeder, Simms, Bolze, and Geske (1996). Few studies have examined the value of dam characteristics. Parcell, Schroeder, and Hiner (1995) estimated price models for cow calf pairs, and Mintert, Blair, Schroeder, and Brazle (1990) analyzed factors affecting cull cow prices. Comparable research has not been conducted for the broodmare market. Studies have been conducted on the yearling market. 3 Karungu, Reed, and Tvedt (1993) examined the importance of macroeconomic factors on Thoroughbred yearling prices. Buzby and Jessup (1994) 2 Heritability estimates for selecting breeding horses for speed ranges from 25 to 50%; (Field & Cunningham, 1976; Heintz, 1980; Tolley, Notter, & Marlowe, 1983). The heritability estimates reflect that selection for speed can be effective, and therefore a breeder must incorporate measures of speed in broodmare management decisions. 3 The yearling market is the most significant source of revenue to breeders, and is the first stage in producing a racehorse (Neibergs & Thalheimer, 1997).

HEDONIC PRICE ANALYSIS OF BROODMARE CHARACTERISTICS 301 identified yearling-specific variables in their investigation of Thoroughbred yearling prices. Lansford, Freeman, Topliff, and Walker (1998) analyzed Quarter horse yearlings. Neibergs and Thalheimer (1997) developed a structural model of the Thoroughbred yearling market. The combination of intermediate heritability estimates of racehorse speed, registration constraints on artificial reproduction biotechnology, a long generation interval, and the large capital requirement required for Thoroughbred production necessitate that broodmares be evaluated relative to the marginal value of the heritable characteristics needed to produce a successful racehorse. Racing success is determined by several inherited factors (i.e., length of stride, stamina, conformation) and environmental factors (ability of the trainer, proper nutrition, the opportunity to compete, etc.) to produce a horse with the speed to win races. Speed is a quantitative phenotype that results from a composite of genetic and behavioral characteristics. Speed can be measured in terms of race earnings and the quality of races in which the horse competes. To maximize the genetic potential for speed, a breeder will have to select successfully for all traits responsible for racing success simultaneously. The variation in selecting for speed is due to environmental factors, and because multiple traits are actually being selected for. Breeding decisions that mate selected individuals based on their favorable racing records result in offspring with marked variability in their success as race horses. This may be due to two factors. First, it is possible that some of the selected parents do not have favorable genetics, but have had exposure to exceptionally favorable environments. A second explanation for the high variation in response to selection for speed in racehorse, may be because only alleles, 4 not genotypes 5 are transmitted to offspring. An exceptional racehorse may contain a unique array of genotypes that resulted in its racing success. However, since only alleles are passed on to a horse s offspring, these genotypes may be disrupted by Mendelian segregation 6 and recombination. 7 This explains why repeated matings of a broodmare to a sire produce offspring with varied success as racehorses and breeding prospects. THOROUGHBRED BROODMARE HEDONIC MODEL The derived demand for a broodmare is a function of her expected productive capabilities to produce yearlings. At a point in time, the expected yearling price is constant. Therefore, broodmare price is a function of her expected productive characteristics. Broodmare characteristics can be classified into three categories: breeding, racing, and genetic characteristics. Breeding characteristics reflect the broodmare s expected ability to produce foals. Racing characteristics refer to the broodmare s racing career. Genetic characteristics refer to the quality of the broodmare s pedigree. Adding marketing factors, Thoroughbred broodmare price, p i, can be specified as: p i 5 f ~x ij, x ik, x il, x im! (1) 4 Alleles, are the variant forms of any given gene. One form (or allele) of each gene is contributed to the offspring from each parent so that offspring have two copies of each gene. 5 The combination of the allele given by the dam and the allele given by the sire comprise the genotype. The mix of genotypes that any one individual possesses is unique, because the specific alleles given to them by their parents may differ at each mating. 6 Mendelian segregation is the random separation of either the allele from the dam into ova or the sire into sperm during meiosis. 7 Recombination is the reshuffling of the alleles inherited from an individual s parents during spermatogenesis or oogenesis.

302 NEIBERGS where i is an index representing an individual broodmare, and j, k, and l are indices referring to breeding, racing, and genetic characteristics respectively. The index m refers to a vector of market factors. The vector of characteristics, x, are objectively measured in the sense that all consumers perceptions of the amount of characteristics embodied in each broodmare are identical, although breeders may differ in their subjective valuations of alternative packages. Specific variables included in the model and their expected signs are presented in Table 1. Breeding characteristics important to broodmare price include factors describing the broodmare s expected breeding performance. Broodmares are sold barren (not pregnant) or in-foal (pregnant). Barren mares, BARREN, are discounted due to the loss in earnings of not being in-foal, for the increased production costs of maintaining an open broodmare, and for the increased risk due to the potential lack of reproductive soundness. Barren represents broodmares that have been exposed to a stallion, and are not pregnant at the time of the sale due to reproductive inefficiency. Young broodmares retiring from racing may also be barren, but they have not been exposed to a stallion. These mares are identified as broodmare prospects, BMP. A broodmare s reproduction efficiency is measured by REPRO, which is the percentage of times a broodmare is open relative to her age. If the broodmare is in-foal, the stallion the broodmare was bred to is publicly dis- TABLE 1. Variable Definition of Variables Used in Thoroughbred Broodmare Hedonic Model Unit of Description Measure Expected Sign Dependent Variable p Individual broodmare price $/broodmare N/A Breeding Characteristics 1 BARREN Binary variable 5 1 if broodmare is barren Binary 2 BMP Binary variable 5 1 if a broodmare prospect Binary 2 REPRO Percent of time broodmare is open relative to age Percent 2 SFEE Stud fee of covering sire, 0 if mare is barren 2 $ 1 AGE Age of broodmare in years Years 2 BTPROD Binary variable 5 1 if a black type producer Binary 1 GSPROD Binary variable 5 1 if a graded stake producer Binary 1 EPF Average earnings per foal of racing age $ 1 Racing Characteristics EARN Broodmare s career race earnings $ 1 BTYPE Binary variable 5 1 if a black type winner Binary 1 GSTAKE Binary variable 5 1 if a graded stake winner Binary 1 Genetic Characteristics BTDAM Binary variable 5 1 if broodmare dam is black type Binary 1 BTSIBL Binary variable 5 1 if sibling is black type Binary 1 GSSIBL Binary variable 5 1 if sibling is a graded stake winner Binary 1 SIRE Broodmare sire quality index Index 1 Marketing factors DSALE Binary variable 5 1 if part of a dispersal sale Binary 2 RNA Binary variable 5 1 if reserve not attained Binary 2 EXPECT Expectations of a mare with no foals of racing age Binary 1 DAY i Dummy variable for day of sale, i 5 1...11 Binary 2 1 Black type refers to boldface type used in sales catalogs to distinguish horses that have won or placed in a stakes race. 2 A stud fee of 0 for a barren mare is not a missing variable, but reflects the expected value of the foal for a barren mare.

HEDONIC PRICE ANALYSIS OF BROODMARE CHARACTERISTICS 303 closed. The stallion s stud fee, SFEE, reveals information concerning the expected value of the foal. The broodmare s age in years, AGE, reflects future earning capacity with younger mares having greater earning capacity. Young broodmares are also perceived to have a greater potential of producing a high-quality foal. The youngest age a broodmare can be bred is two years. Reproductive and biological constraints limit the maximum age of a broodmare. Broodmares over 20 years old are sharply discounted, due to potential reproductive problems, and decreased expected earnings. Many broodmares in the sale have foals of racing age. The quality of a broodmare s production is reflected as being a black-type producer, BTPROD, or graded stakes producer, GSPROD. Black type refers to the boldface type used in sales catalogs to distinguish horses who have won or placed in a stakes race. Stakes races are the highest class of racing. There is a range in quality of stakes races. The quality classification of stake races, from low to high, ranges from ungraded stakes races to grade III, II, and I stake races. About 4%; of the total number of races run per year are ungraded stake races. Less than 1%; of total races are graded stake races. A black-type designation identifies a horse of superior quality. Although the majority of horses do not have a black-type designation, they can be ranked relative to the amount of purse earnings they have won. A third measure of the ability of a broodmare to produce successful race horses is reflected by the average purse earnings per foal of racing age, EPF, that she has produced. Racing characteristics indicate the broodmare s ability as a race horse. Broodmares with greater racing ability are expected to have the genetic characteristics needed to produce foals with superior racing success. Three measures reflect racing characteristics. Race earnings, EARN, indicate the mares success at winning races, and provides a continuous ranking measure between mares. Earnings provide a proxy for the combination of genes linked to speed in a race horse, and also provide some indication of conformation. Horses with superior conformation are more likely to win races and remain physically sound, which is reflected by higher earnings. The quality of competition the broodmare faced is reflected by whether the broodmare was a black-type, BTYPE, or graded stakes, GSTAKE, winner. A Thoroughbred s pedigree is a key attribute in its expected ability to produce quality yearlings. Genetic characteristics reflect the quality of the mare s pedigree. The racing success of a broodmare s pedigree is a phenotypic measure of the broodmare s genetic potential to produce offspring with superior racing success. Pedigree factors are indicated by a black-type dam, BTDAM, and black-type and graded stake winner siblings, BTSIBL and GSSIBL respectively. The quality of a broodmare s sire is represented by an index of sire quality, SIRE. 8 8 Due to the comprehensive inclusion of all mares in the sale, published sire indices accounted for less than a quarter of the data observations. Data requirements prevented augmenting published sire indices to the entire sample. Therefore a sire quality index using available data and The Blood-Horse s (1996c) leading broodmare sire list was calculated as follows: Average Earnings of Stallion s Foals 3 Number of Stake Winners Sired by Stallion 3 Stallion s Ranking on the Broodmare Sire List The Blood-Horse broodmare sire list ranks the top 70 broodmare sires as of the date of the sale. If the stallion was not on the broodmare sire list, it was assigned a value of 1. The above equation was normalized using by the average to develop an index ranging from.001 to 14.1. An average stallion would have an index value of 1.0.

304 NEIBERGS There are three variables in the SIRE index. Average foal earnings show the ability of the stallion to sire racing foals and place younger stallions with fewer foals on an even comparison with older stallions with many foals. The average further controls for stallions that have only one offspring with outstanding earnings. The industry focuses on quality of races, so the number of stakes winners reflects the quality of the stallions foals. And the stallion s ranking on The Blood-Horse s leading broodmare sire list incorporates available information on how the industry perceives dam sire quality. The leading broodmare sire index ranks stallions using the aggregate earnings of the foals out of all dams sired by a stallion whose dams had at least one runner. In November 1996 (the month and year of the study), 70 stallions were ranked by this index. The rank on the broodmare sire index can vary greatly from the earnings of the foals directly sired by him. For example, the top five stallions on the leading broodmare sire index, ranked 69, 20, unranked, 59 and unranked on the leading sires index, which is based on a stallion s foal earnings. The multiplicative specification increases exponentially with the quality of a stallion. An exponential distribution is typical of Thoroughbred industry when examining quality, prices, and earnings. The market factors reflect conditions specific to a broodmare and to the day of the sale. Owners of horses offered in the sale set a reserve price. If the last competitive auction price bid is below the reserve price, it is termed reserve not attained, RNA, and there is no transfer of ownership. The appropriateness of reserve prices has been questioned in the past because owners may overvalue their horses and set an unrealistically high reserve price. If the estimated parameter on RNA is negative, then the broodmare in question would have a higher expected value based on its characteristics than the final auction price bid at the sale. This would indicate that the reserve set by the owner is appropriate, and would identify a market inefficiency on this particular horse if it received a lower sale price relative to the merit of its characteristics. The price for a RNA horse is the last competitive bid. A dispersal sale occurs when an owner is dispersing its bloodstock investment and it is publicly noted. Historically dispersal sales, DSALE, were perceived as being discounted. Expectations are a key market factor throughout the Thoroughbred industry. There are substantial financial rewards for purchasing and producing superior quality bloodstock. In the case of broodmares, it is the expectation of producing successful foals. Due to the biological lag from reproduction through the foal maturing into a race horse, many broodmares are sold that do not have foals of racing age. These broodmares are sold with the expectation of their ability to produce successful race horses without a measure of their foals on-track ability. The expectation factor associated with these mares is represented by EXPECT. The day of the sale is represented by DAY i. In a sale that spans several days, as the day of the sale increases, there is a hypothesized negative impact on price due to the increase in supply and buyer fatigue. DATA The Keeneland November bloodstock sale is the primary broodmare market for the Thoroughbred industry. In the 1996 November sale, 1,847 broodmares were offered for sale, which represents 31%; of all broodmares auctioned in North America (The Blood-Horse, 1996). To facilitate the sale, Keeneland, as the sales company, produces a catalog of horses offered in the sale. The catalog provides information on each characteristic in Table 1 except for the sale price, stud fee, RNA, SIRE, and EPF. Data on broodmare price and

HEDONIC PRICE ANALYSIS OF BROODMARE CHARACTERISTICS 305 RNA were obtained from The Blood-Horse. Data on stud fee were obtained from the Annual Stallion Register (1996). SIRE was calculated by combining data from the catalog and The Blood-Horse leading broodmare sires list. Data to calculate EPF was obtained from combining data from the catalog and from the BRIS American Produce Records (1997). Complete data for the vector of characteristics were obtained on 1,602 broodmares and their associated 4,955 offspring. Summary statistics of the data are provided in Table 2, and a histogram of broodmare price is presented in Figure 1. Average broodmare price was $71,271. Prices ranged from $500 to $2.6 million. Seventy-four percent of the broodmares sold were below the average. The average stud fee was $16,932 with a range of $0 to $250,000. If the broodmare was barren, the stud fee was set to $0. Five percent of the broodmares in the study were barren and 4%; were broodmare prospects. The average reproduction efficiency measure was 0.08, and ranged from 0 to 0.50. The age of the broodmares ranged from 2 to 23, with an average age of 8.5 years. Fifteen percent of the broodmares were black-type producers, and 7%; were graded stake producers. The broodmares in the study produced 4,955 foals of which only 6%; were black-type winners, and only 2%; were graded stake winners. The average earnings per foal of racing age were $14,661 and ranged from 0 to $315,540. A quarter of the broodmares in the study were sold with no foals of racing age; EXPECT was 0.25. Average broodmare race earnings were $62,618, and ranged from 0 to $1.27 million. Twenty-three percent of the broodmares were black-type winners, and TABLE 2. Summary Statistics of Thoroughbred Broodmare Sale Data, Keeneland, 1996 Variable Mean Standard Deviation Minimum Maximum Continuous Variables p 71,271 140,630 500 2,600,000 SFEE 16,932 24,693 0 250,000 REPRO 0.08 0.1 0 0.5 AGE 8.5 4.3 2 23 EPF 14,661 33,447 0 315,540 EARN 62,168 109,440 0 1,266,460 SIRE 1.0 2.5 0.0001 14.1 Binary Variables 1 BARREN 0.05 0.21 0 1 BMP 0.04 0.20 0 1 BTPROD 0.15 0.27 0 1 GSPROD 0.07 0.26 0 1 BTYPE 0.23 0.42 0 1 GSTAKE 0.06 0.23 0 1 BTDAM 0.38 0.49 0 1 BTSIBL 0.68 0.46 0 1 GSSIBL 0.26 0.44 0 1 DSALE 0.03 0.18 0 1 RNA 0.15 0.35 0 1 EXPECT 0.25 0.43 0 1 n 5 1,602. 1 DAY i is a binary variable representing the average number of broodmares sold on each day of the sale for the eleven days of the sale. The mean of DAY i in order is 0.08, 0.10, 0.09, 0.11, 0.10, 0.10, 0.09, 0.10, 0.11, 0.06, 0.05.

306 NEIBERGS Figure 1 Thoroughbred broodmare sale price histogram, Keeneland 1996. 6%; were graded stake winners. Thirty-eight percent of the broodmares were out of a black-type dam. Sixty-eight percent of the broodmares had at least one black-type sibling, and 26%; had a graded stake sibling. Only 0.3%; of the broodmares were identified as part of a dispersal sale, and 15%;were identified as RNA. RESULTS AND DISCUSSION There is no theoretical principle that can be applied a priori to specify an explicit functional form. The model was initially estimated using a Box Cox specification to test alternative functional forms. Likelihood ratio tests rejected both the linear and double log functional forms. 9 A semi-log functional form was chosen to estimate model parameters based on descriptive econometric measures (goodness of fit statistics, appropriate economic signs and t ratios): ln~ p! 5 a 1 ( j 8 b j x j 1 ( k 3 b k x k 1 ( l 4 13 b l x l 1 ( b m x m 1 e (2) m A semi-log functional form is theoretically compatible with a hedonic price model because each broodmare represents a unique combination of breeding, racing, genetic, and marketing characteristics that cannot be disentangled. As a result, the implicit price of each characteristic is a function of the level of all characteristics embodied in the broodmare. An implication of the semi-log specification is that as the combination of preferred characteristics in a broodmare increases, broodmare price increases exponentially. This accurately represents the broodmare price distribution illustrated in Figure 1. Also, a semi- 9 The Box Cox estimate of l is 0.15. The likelihood ratio test statistic for a linear functional form (l 5 1) is 164.2, and for the double log functional form (l 5 0) is 4,947. The critical value for a 1%; level of significance of the x 2 6.64 resulting in a rejection of null hypothesis of both linear, and double log functional forms.

HEDONIC PRICE ANALYSIS OF BROODMARE CHARACTERISTICS 307 log functional form produces hedonic results that can be easily expressed as price flexibilities and marginal values. The price flexibility with respect to a continuous characteristic is the percentage change in price with respect to a 1%; increase in a characteristic from its mean. For a discrete broodmare characteristic, the price flexibility is the percentage change in price due to the presence of the characteristic relative to its absence. The price flexibility with respect to characteristic x n, can be expressed as: F p, xn 5 Dp * x 5 e bn gxn 2 1 n Dx n p 5 g e b n 2 1 if x n is continuous if x n is binary (3) where g is defined to be a 1%; change, and n represents a broodmare characteristic ~n [ j, k, l, m!. The marginal value is the first partial derivative of the anti-log of equation (2) with respect to a continuous characteristic x n : ]p 5 b n Se a1( 8 3 4 13 b j x j j 1( b k x k k 1( b l x l l 1( b m x m ]x n md (4) For a binary characteristic variable, such as a broodmare that is a graded stake producer, the marginal value is the difference between the predicted broodmare price of a graded stake producer, and the predicted price of the broodmare not being a graded stake producer all else held constant: Dp 5 @e~!6 xn 51# 2 @e~!6 xn 50# (5) The cross-section nature of the data suggests potential problems of heteroskedastic errors and degrading collinearity. Multiplicative heteroskedasticity was identified as a problem and corrected using the Shazam correction procedure for multiplicative heteroskedasticity. Degrading collinearity was not identified as a problem. Although a number of characteristics are correlated, the variation of the characteristics both within an individual broodmare and across all broodmares is such that collinearity is not a problem. Parameter estimates, marginal values, and price flexibilities of the Thoroughbred broodmare hedonic price model are presented in Table 3. The model is empirically robust with an adjusted R 2 of 0.74. The model provides a high explanation of the variation in broodmare price in comparison to yearling price models, which have an R 2 of 0.42 (Lansford et al., 1998), and 0.26 (Buzby & Jessup,). The high R 2 for this broodmare model indicates that the characteristics included in the model largely explain the variation in broodmare price. All model variables are strongly significant with the exceptions of REPRO, DISPERSE, RNA, and sale day variables DAY 2 and DAY 3. The residuals were tested for normality using the Jarque Bera test. The normality of residuals could not be rejected at the 1%; level of significance, indicating the model accurately represents the full distribution of broodmare price. In Figure 2, the predicted prices were plotted against the actual prices, and Figure 3 provides a histogram of the residuals, both of which support the conclusion that heteroskedasticity has been corrected and the residuals are normally distributed.

308 NEIBERGS TABLE 3. Parameter Estimates, Marginal Values and Price Flexibilities of Thoroughbred Broodmare Characteristics Variable Parameter Estimate t-statistic Significance Level Marginal Value Price Flexibility 1 Intercept 11.250 125.7 0.000 Breeding Characteristics BARREN 20.665 26.0 0.000 215,010 20.49 BMP 20.225 22.5 0.001 26,097 20.20 REPRO 20.263 21.3 0.306 27,878 20.02 SFEE 1.245E205 13.9 0.000 0.37 0.21 AGE 20.102 216.6 0.000 23,051 20.86 BTPROD 0.311 4.3 0.000 10,634 0.36 GSPROD 0.443 4.7 0.000 16,178 0.56 EPF 5.362E206 7.1 0.000 0.16 0.08 Racing Characteristics EARN 1.622E206 7.1 0.000 0.05 0.10 BTYPE 0.328 7.1 0.000 10,791 0.39 GSTAKE 0.441 4.9 0.000 16,194 0.55 Genetic Characteristics BTDAM 0.136 4.3 0.000 4,130 0.15 BTSIBL 0.130 3.5 0.001 3,788 0.14 GSSIBL 0.311 7.5 0.000 10,043 0.36 SIRE 5.258E202 8.2 0.000 1,574 0.05 Marketing Factors DSALE 2 20.137 21.1 0.493 23,862 20.13 RNA 2 20.022 20.5 0.852 2661 20.02 EXPECT 0.171 4.4 0.000 5,339 0.19 2 DAY 2 20.108 21.3 0.193 23,096 20.10 2 DAY 3 20.115 21.4 0.162 23,288 20.11 DAY 4 20.536 26.8 0.000 213,198 20.42 DAY 5 20.745 29.4 0.000 216,908 20.53 DAY 6 20.954 210.9 0.000 220,246 20.61 DAY 7 21.131 213.2 0.000 222,530 20.68 DAY 8 21.307 214.6 0.000 224,999 20.73 DAY 9 21.594 217.4 0.000 228,279 20.80 DAY 10 21.826 218.8 0.000 228,270 20.84 DAY 11 21.854 216.9 0.000 227,757 20.84 n 5 1,602. DAY 1 is the base dummy variable. 1 The price flexibility for a continuous characteristic is calculated by assuming a one percent increase from the mean for that characteristic, i.e., g 5 0.01 in Eq. (3). 2 Estimated parameter is not statistically significant. Breeding Characteristics The broodmare s breeding characteristics have the greatest price effect. The ability of a broodmare to produce graded stake and black-type offspring have large marginal values of $16,178 and $10,634. These characteristics have price flexibilities of 56 and 36%, respectively. Given that the goal of breeding broodmares is to produce race horses, the ability of a broodmare to produce black-type and graded stake winners are not surprisingly identified as factors of paramount importance. The ability of a broodmare to produce horses successful at winning races is reflected by a marginal value of 0.16 for average earnings per foal, EPF at the mean. This provides an additional premium to black-typeand graded-stakes-producing broodmares, because these races have the highest purses.

HEDONIC PRICE ANALYSIS OF BROODMARE CHARACTERISTICS 309 Figure 2 Comparison of actual and predicted broodmare price. A barren mare has a marginal value discount of $15,010 representing the increased production costs from maintaining an open broodmare, and the increased risk due to the potential lack of reproductive soundness. Breeders can use this value in a marginal cost benefit analysis on investing in additional inputs and allowable biotechnology to ensure the broodmare is in-foal. A broodmare prospect, BMP, is also discounted $6,097 for her barren state, but due to the young age and her expected potential the discount is less severe than that of BARREN. While the reproduction efficiency measure, REPRO, is the correct sign, it is not significantly different from zero. This may indicate that breeders expect to overcome reproduction problems with improved management, and, in many cases, buyers of higher quality mares discounted reproductive efficiency in order to obtain the quality characteristics associated with the mare. Also, in contrast to cattle production where often an open cow is culled, the industry does not expect broodmares to produce every year. Often, a management decision is made to leave a mare open to produce an earlier and more precocious foal from the following breeding season. These factors contribute to horses having the lowest reproduction rate of all domestic animals (Lohman & Kirkpatrick, 1984). The marginal value of stud fee indicates that the return per dollar invested in stud fee, relative to its mean, is $0.37. Although this is a relatively small value, the range of stud fee is large and can have a significant impact on broodmare price. Also, in addition to the return on stud fee, these mares will not be discounted for being barren. 10 Broodmares lose $3,051 in value for each year increase in age relative to the mean age of 9 years old. 10 The combination of the marginal value of the average stud fee (0.37{$16,932) plus not having the discount for being barren, $15,010 indicates that the return per dollar of stud fee at the average is $1.26.

310 NEIBERGS Figure 3 Histogram of residuals with superimposed normal distribution curve. Racing Characteristics Racing characteristics provide a phenotypic measure of a broodmare s genotype linked to speed, and have significant positive effects on broodmare price. The ability to win highquality, high-purse, black-type and graded stake races provides large marginal values of $10,791 and $16,194 respectively. Their associated price flexibilities are 39%; for winning a black-type race, and 55%; for a graded stake race. Race earnings have the lowest marginal value in the model. For each dollar of earnings relative to the mean, broodmare price changes 5 cents. However, like stud fees, earnings have a large range from zero to over $1.27 million. As a result, earnings have a significant price effect. Average broodmare earnings provide a $3,018 price premium. Results on race characteristics provide information to breeders of fillies 11 in training to evaluate the marginal value of racing characteristics of a broodmare relative to the financial return of maintaining the filly in training as a racehorse. Genetic Characteristics Genetic characteristics are significant factors influencing broodmare price. The marginal value of a one-unit increase in the sire quality index from its mean is $1,574, which corresponds to a price flexibility of 5%;. The marginal value of a black-type dam is $4,130. Stake-winning siblings are also important. A black-type sibling has a marginal value of 11 Fillies are female horses that have not reached their fifth birth date or have not been bred. Fillies are broodmare prospects.

HEDONIC PRICE ANALYSIS OF BROODMARE CHARACTERISTICS 311 $3,788, and a graded-stake-winning sibling s marginal value is $10,043. Genetic characteristics are phenotypic expressions of the genotypes linked to speed of the broodmare s dam and siblings. Broodmares with superior genetic characteristics are more likely to transmit superior alleles to their offspring. Marketing Factors The marketing factors reveal information concerning the market in general. The variable RNA was not found to be statistically significant. This reveals that the hammer prices (i.e., the last competitive auction price bid) that these horses receive are an accurate reflection of their value. Based on this model, there is no additional value in the broodmare that would justify setting a reserve price above the hammer price for these horses. Fifteen percent, or 235 broodmares in the data set, were RNA sales. Dispersal sales had a negative sign, indicating concurrence with the market s perceived discount of dispersal sales, but it was not statistically significant. Many Thoroughbred investors are considered to be risk lovers because they make substantial financial investments for expected returns that follow an exponential distribution (Neibergs & Vinzant, 1999). Buyers compete to find unproved horses that can provide substantial financial rewards if they produce above expectations. There are a number of cases in which the market failed to identify superior individuals that went on to produce substantial financial return. The EXPECT variable provides a measure of the risk-loving preference of the industry, as a $5,339 premium is paid for unproved broodmares based on the expectation that their value will increase as their foals prove themselves as race horses in competition. Twenty-five percent of the broodmares in the sale fell into this category. EXPECT indicates that broodmare sellers have the opportunity to cull unproved broodmares to take advantage of this premium. Using the first day of the sale as the base dummy variable, each progressive sale day had a price discount that was statistically significant from sale day 4 to day 11. The sale day price discount peaks on days 9 and 10 at about $28,270 and declines slightly on day 11 to $27,757. The decrease in the discount on the last day represents a lower number of horses sold on that day, and potentially increased competition between buyers who did not satisfy their demand in previous sale days. The price decline as sale day increases reflects excess supply and buyer fatigue. Breeders may want to consider alternative auctions or a private sale, if their broodmares are to be sold in the lower half of the sale. It may be more profitable to sell the broodmare in the top half of the sale at a less prestigious auction. General Discussion The results of this study are relative to market conditions in 1996, which was the second year of sustained growth in broodmare price continuing through 1999. Figure 4 shows how average broodmare price has changed since 1990. The growth in average price is due to buyers increased willingness to pay for broodmares quality characteristics. The Thoroughbred bloodstock market is in a growth phase as purses, stud fees, weanling prices, and yearling prices have all been increasing in response to improved economic conditions affecting the Thoroughbred industry. This points out the need for additional work to evaluate how demand for broodmare characteristics changes in response to economic

312 NEIBERGS Figure 4 Average real broodmare sale price, Keeneland, 1990 1999. conditions over time. An objective of this study was to establish the set of characteristics affecting broodmare price as a precursor to this more in-depth study. There is a mystique that exists in the Thoroughbred breeding fraternity. Thoroughbred breeding decisions seems to remain an art form as opposed to the application of science practiced by most other domestic livestock species by their utilization of artificial insemination, embryo transfer, and other genetic biotechnology, which are not allowed by the Thoroughbred industry. Producers of all species make breeding decisions with the objective of improving desired physical characteristics by improving the gene pool within each breed through selection pressure for desired genotypes. Genetic improvement increases production and improves phenotypic quality with the implicit objective of improving financial performance. For example, dairy cows are selected for milk production and biomechanical soundness, and swine are selected for a uniform quality carcass that improves the efficiency of production, packaging, and retailing. The Thoroughbred industry is no different in that there are heritable characteristics undergoing selection pressure, with the goal of producing competitive race horses. However, the Thoroughbred industry is unique in that its genetic progress is constrained by a long generation interval, the limited use of biotechnology, and the strong environmental impact all of which can disguise the phenotypic expression of desired heritable characteristics. These factors limit the progress of overall breed improvement. Also, the goal of biotechnology research and breeding decisions with other domestic livestock species is to produce an animal of uniform quality with the desired combination of characteristics. The breeding of domestic livestock species seeks conformity between individuals, but the Thoroughbred industry s production goal is to produce outliers, or race horses with such superior speed that they dominate the competition. These factors combine to make the Thoroughbred bloodstock market a unique case in comparison to the traditional livestock species analyzed by economists.

SUMMARY AND CONCLUSIONS The Thoroughbred breeding industry has substantial regional economic importance, but it has yet to be widely addressed in economic literature. This study develops a hedonic price function to estimate the value of Thoroughbred broodmare characteristics. A semilog hedonic price model was developed using 1,602 broodmares, and their 4,955 foals. Phenotypic expressions of genetic and production characteristics provide useful information in explaining broodmare price variation. Empirical results indicate that a number of breeding, racing, and genetic characteristics, in addition to market factors, have significant effects on the prices paid at auction for broodmares. In particular, a broodmare that has produced a graded stake winner, a broodmare that has won a graded stakes race, and a broodmare with a graded stake winner in her pedigree provide the greatest positive marginal value increases in price relative to the mean of these variables. This is consistent with expectations. Horses that win graded stakes have the greatest purse earning potential and, as identified in this model, the greatest value as a breeding prospect. Breeders have traditionally combined information on race performance and pedigree evaluations to select potential racing stock, but this evaluation has primarily been a subjective analysis. Price differentials are related to several factors. Therefore, consideration of individual characteristics across broodmares is difficult. Before a breeder can evaluate whether or not to purchase a broodmare possessing a set of characteristics the breeder must know both the marginal cost and the marginal benefit of the characteristics. Knowing how the market values broodmare characteristics can enhance pricing strategies and production goals. The hedonic model provides estimates of the marginal value of broodmare characteristics, so that breeders can develop selection criteria to develop breeding programs. The information can be used for marketing management decisions concerning culling, and replacement purchases. The results also provide accounting information for asset valuation. For example, the model predicts that a broodmare s value increases by $16,178 if she produces a graded stake winner. This increases the broodmare owner s equity, and provides accounting information for financial performance analysis. This information, in turn, has potential implications on broodmare culling decisions to generate cash flow to capitalize on the broodmare s increased value. The results from this model establish a set of broodmare characteristics and identify their relative importance and valuation at a specific point in time. The data collected was for 1996, which was the second year of a sustained price recovery. The results are applicable to this year alone and are not comparable to current prices due to an increase in the willingness of buyers to pay for broodmare characteristics in response to improved economic conditions across the industry. Additional work is needed to determine how characteristic values change relative to economic conditions in the Thoroughbred industry. REFERENCES HEDONIC PRICE ANALYSIS OF BROODMARE CHARACTERISTICS 313 Bloodstock Research Information Services (BRIS). (1997). American produce records 1920 1996. Lexington, KY: Buzby, J.C., & Jessup, E.L. (1994). The relative impact of macroeconomic and yearling specific variables in determining Thoroughbred yearling price. Applied Economics, 26, 1 8. Dhuyvetter, K.C., Schroeder, T.C., Simms, D.D., Bolze, R.P., & Geske, J. (1996). Determinants of purebred beef bull price differentials. Journal of Agricultural and Resource Economics., 21, 396 410.

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