Cost of living and the thoroughbred industry
With cost-of-living pressures dominating the headlines over the past 12 months, By The Numbers looks at how the thoroughbred industry has been historically impacted by high inflation.
You would have to be living under a rock to have not realised that the global economy is undergoing a major challenge with inflation over the past year.
Discussion of the complexity of the inflationary cycle, the subsequent spike in interest rates and the long-term impacts on the Australian economy are best left for better-qualified people than this columnist, but it’s safe to say that there are significant implications for the broader thoroughbred industry.
Cost of living has been cited as one of the factors behind the declines in two key measures of the industry’s commercial health, yearling investment and wagering, so far in 2023.
It’s a complex relationship, but the current peak in costs has impacted everything from feed to labour and transport expenses, while aspects such as workcover premiums and land tax have jumped, putting greater pressure on businesses.
Accordingly, the expense of breeding and selling thoroughbreds has escalated as have training fees for owners while increased regulation and taxation has meant tighter margins for wagering providers who are returning less to the pockets of punters.
The Consumer Price Index (CPI) has been the long-held measurement of inflation, and while it is not an exact measure of cost of living – the Australian Bureau of Statistics uses a series of Selected Living Cost Indexes to do this – it is closely related and provides important historical context.
Aspects such as bloodstock investment or wagering aren’t included in CPI’s 87 household expenditure classes but CPI is a strong guide to the availability of discretionary income, which has an important relationship to the commerce of the thoroughbred industry.
The most recently released CPI figures are from June 2023, with annual CPI in Australia tracking at 6.0 per cent, following on from 6.1 per cent in June 2022. The last time Australia recorded two higher consecutive annual June figures was in 1989 and 1990, when CPI was 7.5 and 7.7 per cent respectively.
This is the fourth period in the 21st century where CPI has peaked in Australia, and it is from those three previous peaks that we can hopefully gain some insight into what a sudden jump in inflation might mean to the economics of the thoroughbred industry.
Data from the Racing Australia Fact Book allows us to see how high inflation has historically impacted the two key areas outlined above, bloodstock investment and wagering.
The first year to look at is 2001. In that year, the CPI figure rose to 6.1 per cent, up from 3.1 per cent 12 months earlier. The peak in inflation occurred at the same time as a global economic downturn, prompted by the bursting bubble of the technology (or dot.com) sector.
Yearling investment had more than doubled from 1995 to 2001, but the subsequent Australian yearling sales in 2002 saw a retraction in the yearling market of 3.0 per cent of total spend and 1.7 per cent on average. The breeding sales market, traditionally more volatile than the yearling market, actually rose for broodmares and weanlings in 2002, but declined the following year as CPI dropped to 2.6 per cent.
Wagering growth on Australian horse racing stagnated at 1.3 per cent in 2001-02 (total $9.54 billion), compared to jumps of 6.3 per cent and 3.4 per cent over the previous two seasons. That lull lasted just one season, with growth of 8.9 per cent in wagering investment by the time CPI had come back down in the 2002-03 racing season.
The next peak in inflation occurred in the wake of the global financial crisis in 2008. In June of that year, the annualised CPI recorded by the ABS was at 4.4 per cent, peaking at 5 per cent in September.
The GFC, prompted by a banking crisis, led to a capital shortage across many industries, including the thoroughbred industry where bloodstock experienced its greatest slump since the late 1980s. The average price of a yearling had grown by 31.1 per cent from 2005 to 2008, but in 2009 dropped 31.8 per cent in the space of 12 months.
Overall yearling investment in Australia fell by an even greater amount, 34.2 per cent, or in real terms $127 million, from 2008 to 2009. The average price of a weanling through an Australian sale ring fell 41.8 per cent, while the average price of a broodmare, which had doubled from 2003 to 2008, dropped 51 per cent in 2009.
It was quite a reckoning for the bloodstock industry, compounded by the lingering impacts of the equine influenza outbreak which struck with devastating impact in the spring of 2007.
It took until 2016 for yearling investment [total spend] to get back to where it was pre-GFC, while broodmare and weanling investment only got back on par with those 2008 in 2017. The broader financial issues played a major role, but so too did the fact that commercialising bloodstock was made more difficult as market sentiment changed due to the sudden rise in the cost of living in 2008.
Total wagering on thoroughbred racing in Australia grew 12.1 per cent in 2006/07, but the GFC, plus cost-of-living increases took their toll in 2007/08 when it declined by 1.0 per cent. It lifted again the following season, but then went through a four-year-long period of stagnation.
The last time, prior to the current inflationary cycle, that CPI peaked at 3.5 per cent or above was in June 2011. It was a short-lived peak, which had resolved by the end of 2011 and it didn’t have a discernible significant impact on bloodstock spending, which was still suppressed three years after the GFC. The average price of an Australian yearling grew by 13.7 per cent in 2012 in the wake of that inflationary surge, but overall yearling investment fell by 5.2 per cent.
The rollercoaster weanling market rebounded in 2012, up 22.5 per cent on overall investment, albeit after a 42.3 per cent fall the previous year. It was a similar story in the broodmare sector.
However, from that point, the bloodstock sector went on a decade-long charge of almost continual growth. CPI stayed at less than three per cent from December 2011 until June 2021, setting a platform for people to invest in Australia with certainty.
It was also a period of incredible growth in the wagering environment, set up by significant legal victories for corporate bookmakers, which won them a seat at the table when it came to Australian punters. The innovation thus spurred led to a decade-long surge in wagering growth.
With cost of living under control, discretionary income boosted and a suddenly vibrant bookmaking sector, spending on thoroughbred wagering exploded from $14.4 billion in 2011-12 to $29.1 billion in 2021-22.
As we are so often told, ’past performance is no guarantee of future results’ but what those past periods of high CPI, and the periods of economic uncertainty which so often accompany them, tell us is that consumers are often much more cautious in their investment during these times, be it in buying racehorses or having a bet.
The thoroughbred industry, which relies heavily on discretionary income, is very much linked to the fortunes of the broader economy. The current prolonged inflationary period may be coming to an end, but its severity and length is something the Australian economy hasn’t been through in over 30 years, and its longer-term effects are yet to be seen.
Key thoroughbred industry metrics compared to CPI since 1999/2009
| Year/Season | Annual CPI (June) | % change – yearling investment | % change b/mare investment | % change weanling investment | % change total wagering |
| 1999/00 | 3.1 | 25.9% | 26.4% | 62.9% | 3.4% |
| 2000/01 | 6.1 | 7.1% | -16.3% | -37.5% | 6.3% |
| 2001/02 | 2.8 | -3.0% | 41.3% | 61.2% | 1.3% |
| 2002/03 | 2.6 | -1.5% | -21.8% | -3.5% | 8.9% |
| 2003/04 | 2.5 | 32.7% | 38.7% | 28.6% | 6.0% |
| 2004/05 | 2.5 | 14.3% | 81.2% | 32.4% | 4.9% |
| 2005/06 | 4 | 20.6% | -15.5% | 42.2% | -0.2% |
| 2006/07 | 2.1 | 23.5% | 50.5% | 36.3% | 12.1% |
| 2007/08 | 4.4 | -1.1% | -5.1% | -4.1% | -1.0% |
| 2008/09 | 1.4 | -34.2% | -52.1% | -53.3% | 11.4% |
| 2009/10 | 3.1 | 4.6% | 15.0% | 71.0% | -0.3% |
| 2010/11 | 3.5 | -3.6% | -23.7% | -42.3% | -0.1% |
| 2011/12 | 1.2 | -5.2% | 7.3% | 22.5% | -0.1% |
| 2012/13 | 2.4 | 12.4% | -11.9% | -20.4% | 0.6% |
| 2013/14 | 3 | 4.9% | 77.3% | 3.9% | 7.9% |
| 2014/15 | 1.5 | 21.0% | 12.2% | 60.6% | 1.8% |
| 2015/16 | 1 | 13.0% | -5.3% | 13.8% | -1.0% |
| 2016/17 | 1.9 | 10.3% | 39.2% | 14.2% | 14.9% |
| 2017/18 | 2.1 | 11.3% | -2.9% | 27.7% | 8.3% |
| 2018/19 | 1.6 | -0.3% | 1.2% | 19.6% | 7.1% |
| 2019/20 | -0.3 | -8.0% | -43.3% | -61.8% | 0.7% |
| 2020/21 | 3.8 | 31.5% | 146.0% | 212.7% | 29.1% |
| 2021/22 | 6.1 | 14.8% | -4.1% | -10.8% | 7.0% |
Data compiled by racing season. CPI data taken at June (towards the end of the racing season).