VivaSync

What an odd town Newmarket is. A town that runs on expensive horseflesh and cheap alcohol. A town of nightclubs and early-morning gallops, with the same very thin men sometimes managing to attend both. "A one-horse town with 3,000 horses," as residents like to say. And certainly the only place where I have ever seen, in a bookshop in the high street, a calendar devoted to ferrets.

It is a depressing town in many ways, where stable staff on the minimum wage service horses worth hundreds of thousands for men (and I suppose a few women) worth millions, or billions in the case of Sheikh Mohammed, ruler of Dubai. In one sense, he is ruler of Newmarket, too, with his vast Darley stud farm and clutch of subsidiary studs, stretching across 2,000-plus acres. He has just spent £600,000 on a new cricket pavilion close to the gallops, and his subjects are grateful. Without Sheikh Mo's millions, Newmarket would be far more bedraggled than it is.

This is the story of a wonderhorse, Sea the Stars; of a sport, horse racing; and an industry, equine breeding. But it is a closed, obsessive and secretive world, and we need to begin slowly. Some of the peculiarities of racing have first to be explained. There are two branches: the Flat and jumping (also, to confuse non-aficionados further, called National Hunt). Flat racing is traditionally the sport of kings (now sheikhs and wealthy Irish and American consortia); jump racing of farmers and countrymen. Casual followers of racing used to dote on the Flat, but now seem to prefer jumping: less corporate, more accessible. The Flat, to the concern of many in the sport, is ceasing to fascinate.

This summer, though, it had a godsend – Sea the Stars, one of the greatest thoroughbreds ever and the best to race in Europe for 40 years. The twist in the tail is that, after winning six hugely prestigious races in a row, including the 2,000 Guineas, the Derby and, thrillingly earlier this month, the Prix de l'Arc de Triomphe, he has now been retired. He has won more than £4m in prize money and could probably do it all again next year, but he is a stallion and can potentially earn far more at stud than he can on the racecourse. It makes commercial sense for him to bow out at the top, so the Flat will lose its new hero just as a wider audience had become aware of him.

It doesn't happen in jump racing: if horses stay fit, they can go on until about 12. But Flat racing is an adjunct to a multinational, multimillion-pound breeding industry. There is a huge statue on a roundabout as you enter Newmarket, and it portrays not a racehorse in full flight but a stallion, rearing up beside its handler. All the English classics are for three-year-olds, and are designed to establish which horses are the best of that generation, so they can then be bred from. As breeding has become more commercialised, with powerful studs such as Darley and the mighty Coolmore in Ireland, so racing has in some respects become secondary, a means to the end of producing commercial stallions. It is one reason why the public, which understands racing but takes no interest in breeding, has become disconnected from the sport.

Sea the Stars, which is owned by the wealthy Hong Kong-based Tsui family, will stand at the Aga Khan's Gilltown stud farm in County Kildare in Ireland. He will cover (the polite term for equine intercourse) at least 100 mares a year; the owner of each mare is likely to pay around £75,000 for the privilege; he thus stands to make at least £7.5m a year. He could cover 400 mares if the owners wanted to work him really hard. Many stallions winter in the southern hemisphere, especially Australia, to service mares down under. A well-regarded stallion, whose progeny do well at the track, is a money-making machine. He might go on producing the goods for 20 years. His earnings will dwarf anything he could make on the racecourse. No wonder the statue on the edge of Newmarket is of a stallion rather than a racehorse. The stud farms are playing for the highest stakes of all.

It is a warm, sunny, sedate afternoon when I get a tour of the National Stud, on the edge of Newmarket's July racecourse, from stud secretary Rachael Gowland. The National Stud was once owned by the state and used to breed horses for the cavalry. Now it is owned by the Jockey Club and, under new boss Brian O'Rourke, is trying to raise its profile after a rocky period. It stands four (soon to be five) stallions, the best of which is a sprinter called Bahamian Bounty. Getting him to cover your mare would cost you £10,000, a fraction of what Sea the Stars will cost or what Coolmore's top stallions – Montjeu, Galileo and Danehill Dancer – would set you back. Coolmore doesn't publish its rates, but £100,000 a pop is probably near the mark, because each of those three has established himself as a producer of great racehorses.

The high spot of my visit to the National Stud is a meeting with Silver Patriarch, a lovely grey which won the St Leger in 1997. Silver Patriarch is retired now from stud duties after a not-very-successful career as a sire. His progeny weren't world-beaters, and when that happens the owners of mares look elsewhere. "It's a fashion business," says Gowland. "There will be quite a large percentage of stallions that after two or three years – if their two-year-olds don't run well or they haven't had good yearling prices – just fade into the background." Some stallions will begin covering mares for thousands and end up doing it for a few hundred quid. "They just have to take what they can get," she says.

As Silver Patriarch's iffy career as a sire shows, there is no guarantee that great racehorses will produce other great racehorses. Breeding a Sea the Stars relies on a bit of science and a lot of luck. Wealthy breeders will play the numbers game, owning as many good mares and producing as many foals with top-class pedigrees as possible in the hope that one or two are capable of winning Group One races – the mark of achievement which turns your horse into a commodity because others will want to breed from it. Tony Morris, the UK's leading writer on bloodstock, tells me that a sire will be deemed a success if 6% of its progeny do well at the track. These fortunes may as well be placed on roulette numbers.

Most breeders want to talk about pedigrees. I, of course, want to talk about sex, and when Gowland shows me round the covering shed at the National Stud I tell her I need a detailed description of the sex act. Luckily, horsey women are completely unembarrassable. The breeding season runs from mid-February to June. As soon as the vet decides that the mare is ovulating, she will be brought from a boarding stud – which houses mares only – to the covering shed of the stud in which the stallions stand. Quite often she will have her foal from the previous season with her (a "foal at foot", in the lovely racing phrase). The sex scene is chaotic and very public: there may be a teaser stallion in the shed, whose job is to get the mare excited; the mare herself; her foal, sometimes penned, sometimes just held; the stallion; handlers for all the horses; and sometimes the mare's owner and family looking on from a raised area. "Some people like to make a day of it," says Gowland drily.

In the breeding season, the stallion's sex life runs like clockwork. "He has a timetable," she explains. "He comes at 7 o'clock in the morning, noon, four o'clock in the afternoon, eight o'clock at night and if we're desperate for space [in the schedule] midnight. But he has to have a space in between. We try not to give them five coverings a day unless we can help it. That's hard work for the stallion, and for the staff." Most coverings will impregnate the mare first time, but sometimes they will need a few goes. Also, since everything depends on when the mare is ovulating, lots of slots need to be left free to allow for flexibility in the schedule.

The mare arrives, is checked for inoculations (stud farms are obsessed by the danger of disease), has her tail bandaged up, is washed down, has a large pair of boots put on her back hooves in case she kicks the stallion ("A kick in the knackers can put him out of action for 10 days and that can be expensive," I'm told at one stud), has a leather cape put on to protect her from being bitten by the stallion when he mounts her, gets "bounced" by the poor old teaser stallion (which wears a giant-sized condom to avoid expensive disasters), and then gets mounted by the stallion proper. The sex is brief and to the point, and afterwards they exit the shed in opposite directions. She will probably never even see her lover. It's so unromantic, I complain. "The modern-day thoroughbred doesn't form meaningful relationships," says Gowland.

I feel sorry for the teaser. "It's not a great job," admits Gowland. But she doesn't think the commercial stallion's life is all it's cracked up to be either. "Even they will get bored with covering mares eventually. They get very busy in the season and by the end of it we get the impression they are thinking 'Not another mare!' But they do very much look forward to the beginning of the season." The National Stud used to show a video of a covering to guided tours, but has now withdrawn it. "We decided," says Gowland, "that it was inappropriate for children."

All this noisy, steamy sex could be avoided if the breeding industry embraced artificial insemination (AI). Some influential scientists, notably equine fertility expert William "Twink" Allen, believe they should, but breeders are vehemently opposed. The standard argument is that because AI would allow top stallions to impregnate not hundreds but thousands of mares, it would lead to a potentially catastrophic narrowing of the gene pool. This is disputed by supporters of AI. The incontestable fact is that it would lead to a dramatic fall in covering fees. The semen of a Sea the Stars is worth £75,000-plus because it is available to only 100 or so selected mares every year. Offer it to everyone in a test tube and the value would plummet. One stud owner even raises the prospect of black-market sachets being sold on the back streets of Newmarket.

If the National Stud represents English traditionalism, the huge Darley Stud epistomises global wealth and ambition, each blade of grass perfectly manicured thanks to Sheikh Mohammed's millions. It even has a graveyard, with commanding headstones. Breeding has changed dramatically in the past three decades, with owner-breeders giving way to massive operations such as Coolmore, which from the mid-1970s pioneered commercial breeding and demonstrated how much money could be made from stallions. The credit crunch has hit racing, and bloodstock prices have fallen by 30% or more in the last 18 months, causing covering fees to fall in turn, but the earnings of successful stallions can still be huge and the top of the market is proving more resilient than what might be called the sub-prime end.

I am at Darley, which owns Sea the Stars' sire Cape Cross, to meet the stud's head of marketing, Tania Henry-May, and Jocelyn Targett, who acts as a consultant advising on marketing strategy and overseeing the stud's advertising. Targett, a former Observer deputy editor who switched from journalism 12 years ago to work for Sheikh Mohammed, explains that in valuing a stallion, you should take account only of the first four years. In his first season, he will be popular and cover perhaps 120 mares, and he will probably do well in years two, three and four. But once his progeny are running, his value is in the lap of the gods: if they are no good, the stallion's covering fee will plummet.

Estimates of Sea the Stars being worth £100m – a figure widely quoted in the media in the last fortnight – are, he suggests, wishful thinking; it will all depend how his offspring perform. "In that fifth year, it could be worth nothing, or it could be worth double. There are a lot of horses whose value capitulates at that point. There are lots of examples of horses that retire to stud in a blaze of glory, and then come the fifth season their stock have not done very well and they are no longer in demand. Hawk Wing is a famous example. It was a tremendous racehorse, very good-looking, was very highly rated, went to stud, was very popular but then stopped being a good stallion. It doesn't mean he sired no good horses; he just didn't sire enough to maintain his fame and glory. He is now at stud in Korea."

The correlation between racetrack performance and success as a sire is at best inexact. The greatest sire of modern times is Sadler's Wells, who retired from stud last year because of declining fertility. "Sadler's Wells was a very good racehorse but he was not a superstar," says Tony Morris. "His great gift was that he could get horses better than himself. I give you a guarantee now that Sea the Stars will not get a horse as good as himself. There is not the slightest chance of that, though if he gets lots of horses that are nearly as good as him, he'll be all right."

In breeding, science can only take you so far. Freakishly good racehorses – Brigadier Gerard, a superstar of the early 1970s, was one example – can come from unpromising pairings. Equally, a superbly bred horse can be useless when it gets to the track. The Green Monkey is the most notorious: he was bought for $16m at the Keeneland sales in Kentucky in 2006, ran three times, never managed a win and had career earnings of $10,440, though injury is said to have been a factor.

The element of chance means every breeder can afford to dream, and Targett says dreaming is what holds the sport together. "Yes, there are business practicalities and big money is involved, but everyone is beside themselves with joy at dealing with horses. That's the thing I've got in common with Tania, and that we've got in common with people in stately piles who have been breeding horses for 17 generations, and with farmers in Ireland who always keep a mare. It's a sport full of people who are going to lose, yet also full of optimists, perhaps self-delusional optimists, and dreamers who crave the win and get the win from time to time but have to be thick-skinned enough to smile through adversity."

It's a pleasing image, though Morris bemoans the obsession with "making horses into stallions" in the pursuit of money. For a start, it underplays the genetic importance of the dam (the distaff side of the pedigree). "No stallion becomes great without getting good mares," he says. Targett accepts that while the stallions make all the headlines, because they are the money-spinners, the dam brings just as much genetically and is the basis around which good "families" of racehorses are built. The mother of Sea the Stars is Urban Sea, which won the Arc in 1993 and is the dam of another Epsom Derby winner, Galileo. She died earlier this year, just after giving birth again, but her genes will live on though countless generations of thoroughbreds, especially if Sea the Stars can match Galileo as a great sire. "The dam is much overlooked," says Targett, "because a stallion can have a hundred foals a year whereas a mare can have one."

A few days later, I am in a taxi being driven across the Curragh, the great plain in County Kildare 30 miles south-west of Dublin that is the home of Irish racing. The taxi driver, like almost every Irishman, is horse-mad, pointing out the graves of various famous horses and the stud farm from which Derby winner Shergar was stolen. The tips that matter to him come from trainers and jockeys, but he says they almost always lose, which is why he is driving a cab. We discuss Sea the Stars, the local celebrity who is spending his last few days at trainer John Oxx's stable before going to stud. "That's the trouble with Flat horses," says the cabbie, "you don't see enough of them."

There has been a steady stream of pilgrims to Oxx's yard, paying homage to the champion, and a party of French racing fans are there on the day I visit. Oxx's dining table is covered in letters and cards from racing fans. "Some just offer congratulations," says his wife Caitriona, "but others are telling John what to do with the horse." Nosily, I peer at one on top of the pile which is pleading for Sea the Stars not to be retired, a decision for the Tsui family, not the modest, unassuming Oxx.

In any case, he is now keen for the horse to be on his way. "It'll be nice to hand him over to somebody else," he says, "because you do get a bit anxious. We weren't anxious all year when he was racing, but now that he's finished and is about to leave us you'll be happy to see him go." Oxx isn't even working him on the gallops now in case he throws his rider and makes off in the direction of Kildare town; £50m-plus of horseflesh dodging the buses. Does he know what he's achieved? "I don't think he does," says Oxx, "but he knows he's a bit of a star all right. He's a clever horse, and I wouldn't say that about most horses." Oxx dismisses the critics who say he should be running again next year. "He has proved his greatness and doesn't have to go and prove it all over again."

My meeting with Sea the Stars is, if truth be told, something of an anti-climax. He is undeniably beautiful, but then all thoroughbreds are. My eye is insufficiently expert to see what sets him apart. Oxx tries to explain. "He's a phenomenal-looking athlete. He's big and strong, has got perfect conformation, great length to his neck, and big, powerful quarters; great, correct limbs; plenty of bone. He's just one of these perfect racing specimens." When I pat him, he gets the most enormous erection. It's the largest – and easily the priciest – penis I have ever seen. Oxx says it's an occupational hazard of showing visitors around. "We get women here wearing perfume," he says, "and that always sets him off." Later, as I'm patting his head, he starts chewing my coat, an equine variant on touching the hem.

So how good will history judge him to have been? Oxx explains that the experts who judge the quality of racehorses put him slightly below a handful of great horses from previous eras, but that their formulae are fallible. "Mathematics can be unimaginative and often doesn't allow for a horse's true superiority. Ratings may not really do him justice – that's the general feeling. I wouldn't claim he was the greatest of all time – it's silly to have these bar-stool arguments about who was the greatest. All you can say is that he is one of the greats, and that's plenty good enough." Perhaps I can sell my coat, flecked with the saliva of greatness, on eBay.

I have one final visit to make – to the nearby Irish National Stud, where Sea the Stars was bred, and where his dam, Urban Sea, lived and, in March, died. Chief executive John Clarke gives me a tour of the 1,000-acre farm and introduces me to Urban Sea's final foal, who is grazing in a field. Urban Sea haemorrhaged soon after giving birth to the foal, who has been given the pet name Reborn in homage to his Arc-winning mother. His sire is Invincible Spirit, the Irish National Stud's top stallion. He is born for greatness and, according to Clarke, looks even more impressive than Sea the Stars did at the same age. Does he know what he has to live up to? "He couldn't care less," says Clarke. Perhaps three years from now he, too, will be winning the Derby and the Arc. Millions will ride on his career, but for the moment all he wants to do is frolic in the field, playing with three other foals, unaware of what lies ahead in the curious world beyond the gate.

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