Is Latin talent overpriced?

The Rule 4 draft occurred over a three-day period this week. It is one of the two primary ways a team can acquire amateur talent. The other path is to sign international free agents (IFAs), and on July 2nd, teams will be allowed to sign such players who are at least 16 years old.

Some teams focus on Caribbean and Latin American talent. In 2010, the Mariners, Yankees, Athletics, Braves and Cubs all spent more on acquiring international amateurs than they did in the Rule 4 draft. In contrast, the Nationals, Angels, White Sox and Dodgers spent at least ten times more on the Rule 4 draft than they did on IFAs.

This begs the question: How do Rule 4 picks differ in value from IFAs? During a recent exchange with local bloggers, Matt Klentak (Orioles Director of Baseball Operations) mentioned that the Orioles contracted for a study to be done on the cost efficiency of IFAs and found that investing in Rule 4 talent made more sense. The study is proprietary, so we do not know exactly what this difference is. It also seems that other teams disagree with that proposition. This seems especially true with the small-market Oakland Athletics being one of those teams highly involved in signing IFAs.

So let's try to answer how much different the value between Rule 4 and IFA talent might be. Using Baseball America's numbers for signing bonuses of Rule 4 draftee signing bonuses in the first ten rounds of the 2010 draft, MLB spent $166 million total on 299 players.* The average player earned a bonus of $560,000. Baseball America's numbers for 2010 international bonuses (not including Cuban free agents) accounted for roughly $75.5 million. While we do not have any specific number of international free agents signed, I'll try to estimate. There are 33 Dominican Summer League teams with about 30 players on each team. Players tend to stay at the academies for at most three years, so a rough estimate would be that each team requires 9-10 additional players each year which means 300 new players each season. Using this number, the average Dominican Summer League prospect would cost $250,000.

The difference in cost per prospect suggests that every dollar spent on foreign talent, $2.24 must be spent for an American prospect. However, we have more math to do because this ratio assumes that the two types of prospects are equal in their likelihood to become major leaguers. Using Keith Law's top 100 minor league prospects list, I count 23 IFAs (I did not count three Cubans) and 84 Rule 4 talents. Remember that we started out with essentially 300 new prospects from the draft and IFAs. This means that a Rule 4 talent is about 3.7 times more likely to become a top 100 prospect. This passes the sniff test as IFAs are often signed at a younger age and without good competition to gauge the skills of a player. With less ability to define ability, a team must act in the spirit of Branch Rickey and acquire quality through quantity. The idea being to grab as many prospective talents as possible and wait for the true talent to rise. Factoring in the likelihood of being a top 100 prospect, we now find that a dollar abroad now equal 61 cents at home. It does appear that talent costs considerably less through the Rule 4 draft than it does through international talent signings.

However, a team like the Athletics appears to insist that IFAs are a useful talent pool to exploit. Although it might be cheaper to develop home-grown talent, it is not an infinite resource. Each draft contains about 80-100 players who are going to earn more than a cup of coffee in the majors. This does not leave much to go around. IFAs provide an additional pool to supplement what is available in the MLB draft. The league is staffed with about 27.7 percent foreign-born players, so we can imagine that each year about 20-25 IFAs are signed who will make the majors and play for at least a little while. Based on those numbers, we can say it takes about 15 IFA signings (~$3.75 million) to produce a single player who generates a WAR of 1. The market value for a win these days is about $4.5 million on the MLB free agent market.

If these numbers, based on a lengthy sequence of assumptions, are reasonably accurate we find that our initial query might not be the one on which teams like the A's are basing their decision to invest in IFAs. It might well be that teams invest in IFAs because it is a better way to invest your money than by signing free-agent veterans.

*I did not include signing bonuses for players signed after the first ten rounds. This number in recent years ranges from $20-30 million. This value is likely less or equal to the money it takes to run the various academies for IFAs. Jorge Arangure Jr reported that the Tampa Bay Rays' facility in Brazil will cost $500,000 to $1 million per year to run. They did not have to build that facility themselves, but those who do have to build their own academy typically spend more than $1 million initially just to construct the field and buildings that are needed. With this in mind, I decided to conveniently cross off the extra costs from the draft and the extra costs from running facilities outside of the United States.

Jon Shepherd writes for Camden Depot, the Orioles affiliate of the SweetSpot network.