Why $63 Million for Yoan Moncada Makes Sense

For the last few months, the baseball world has been speculating about Yoan Moncada. The question of who would sign him was less interesting, as the structure of the deal — a 100% tax on the signing bonus, due by the middle of the summer — meant that this was a bidding war that only teams with significant cash flows could justify winning. From the beginning, the Red Sox, Yankees, and Dodgers were identified as the heavy favorites, and in the end, Boston won the battle of the big spenders.

More interesting was the question of how much Moncada would sign for, because this was a bit of a unique situation in MLB. Because Moncada could only be lured with a signing bonus, and because of the tax on the signing, teams were being asked to spend significant present dollars for a chance to buy potential future wins. While this happens on a small scale in the draft and with other young international prospects, teams generally do not have to make these kinds of short-term investments without getting short-term rewards.

The last time I wrote about Moncada, I noted some similarities between signing Moncada and paying the posting fee for a player coming over from Japan, which pushed over $50 million for both Daisuke Matsuzaka and Yu Darvish. Those players also came with a steep up-front cost and hadn’t proven themselves as big league contributors, but neither one spent a day in the minor leagues before jumping into their team’s rotations; they were viewed more as major league free agents, just without the track record that other big league free agents bring.

Moncada has the short track record in common, but unlike Darvish, Matsuzaka, and Masahiro Tanaka, he’s not big league ready. The consensus is that he needs a year or two in the minors, and given that he’s just 19, that might even be aggressive. It wouldn’t be at all strange for him to not make a significant impact at the big league level until he’s 22 or 23, as even the prospects teams are most sold on don’t always develop as quickly as expected. So, the Red Sox $63 million investment — once you double the signing bonus to account for the tax — will likely return little or no value for several years, and because even very good prospects still have high failure rates, there’s a real possibility that this investment never returns anything at all.

But that doesn’t mean he’s not worth the risk. Every signing is a balance of risk and reward, with the amount committed an attempt to find the sweet spot between the chance of success and failure. The more upside there is, the more risk a team should be willing to accept in order to get the chance for that best-case outcome, and while Moncada undoubtedly carries a significant amount of risk, he also comes with significant long-term potential.

For instance, let’s look at what a $63 million investment might suggest the Red Sox think is the likely range of outcomes for Moncada.

moncada-projected-value

In this graph, I’ve plotted a series of probabilities for various outcomes, ranging from Moncada being a complete bust to him turning into a superstar. The Team Controlled Value axis is an estimate of his value above and beyond his pre-arb and arbitration salaries, which is why the odds of him being worth $200+ million over his six to seven years of team control are so low. That kind of performance would naturally lead to quickly escalating arbitration prices, so Moncada would have to be worth something close to $40 million per year — making him a consistent +4 to +5 WAR player — in order to reach those levels. This is the Andrew McCutchen outcome, basically.

More likely, Moncada does not become McCutchen, or even anything that close to him. History suggests a better chance that he turns into something closer to Neil Walker, which is approximately what the middle of that graph represents. The most likely single outcome is that he develops into nothing of value, but the probability of all the success added together are more likely than the chance of failure.

The graph above is an example of what the the Red Sox are betting on, based on the signing price. Broken down into numbers, the graph’s probability distribution would look like this:

Probability Surplus Value Justified Cost
24% $0.00 $0.00
6% $25,000,000.00 $1,500,000.00
18% $50,000,000.00 $9,000,000.00
20% $75,000,000.00 $15,000,000.00
15% $100,000,000.00 $15,000,000.00
14% $125,000,000.00 $17,500,000.00
2% $150,000,000.00 $3,000,000.00
1% $175,000,000.00 $1,225,000.00
0% $200,000,000.00 $600,000.00
Total $62,825,000.00

The percentages are rounded to the whole number, so don’t worry, I don’t think $200 million multiplied by zero percent is $600,000. As the graph and table show, however, the Red Sox aren’t really betting on Moncada turning into a $200 million player. They don’t need him to become a superstar to justify this price; the $63 million commitment works if his most likely outcome is a good-not-great player, with significant bust potential but also some slight chance of turning into a superstar.

Now, keep in mind, I made these probabilities up to demonstrate what the price the Red Sox paid suggests that they may see as his outcome range. But this price fits pretty well with what the public valuation estimates that have been produced of late.

As we’ve noted a few times lately, the most recent research on prospect rankings suggests that the average value produced by a top-10 hitting prospect during their team control years is roughly +15 WAR. If Moncada produces something like that from 2017 to 2023 — assuming the Red Sox will hold him in the minors long enough to get a portion of the seventh year from him — and the cost of a win keeps increasing at the rate it has been increasing, then he’d produce somewhere in the neighborhood of $125 million in value.

But, he’d also have to be paid salaries for each of those years, and if he’s producing at those levels, he’s probably looking at something like $30 million in arbitration awards and pre-arb salaries, which have to be factored out of the value added, knocking him down a bit below $100 million in overall value. $95 million is certainly more than $63 million, but we have to also account for the time differences in the money spent and the wins produced; those 2017 to 2023 wins came at the expense of $63 million in 2015 dollars. So, we have to adjust the value of those future wins into today’s dollars, which looks something like this.

Year Value
2015
2016
2017 $5,000,000.00
2018 $10,000,000.00
2019 $10,000,000.00
2020 $15,000,000.00
2021 $15,000,000.00
2022 $20,000,000.00
2023 $20,000,000.00
Total $73,131,318.67

$95 million in future value, discounted at 4% percent year — the discount rate MLB and the MLBPA use in their calculations — with no value returned for the next two years equals $73 million in today’s dollars. That’s still $10 million more than the Red Sox actually spent, but perhaps that’s the risk premium that is attached because of the fact that teams haven’t scouted Moncada against minor league pitching. That +15 WAR projection came from the results of top-10 hitting prospects, which Moncada may be, but top-10 hitting prospects generally only reach that ranking level after they’ve performed well in the minor leagues. Moncada hasn’t yet, so perhaps teams priced that level of risk into their offers.

Personally, I’m a bit surprised that the bidding topped out at $63 million, given the players involved. The Yankees and Dodgers are both being hit with significant Luxury Tax penalties based on their big league spending, so they don’t have a tax-free avenue to spend $31 million to acquire additional talent. But again, this is a unique circumstance. Teams are generally not asked to spend big time current dollars to buy potential future wins; even long-term contract extensions push the big money back into the years where the value is expected to be produced.

So perhaps this was a tougher sell to ownership groups than I had imagined. Writing a couple of big checks, and then not seeing any return for several years, with a real chance of never seeing any return, is probably a difficult pitch. That said, if Moncada is as good as has been reported, this feels like a bargain. The Red Sox committed less guaranteed money to Moncada than the Diamondbacks did to land Yasmany Tomas, and while Moncada might not be a 2015 player, the difference in upside here seems to be worth the wait.

Toss in the potential for value beyond the just the team control years — the Red Sox now have exclusive rights to sign him to a long-term deal if he does become a superstar — and this price feels light to me. Of course, I’m not the one writing the check, but I would expect that we’ll probably look back at this and wonder why the Yankees didn’t bid $35 or $40 million to keep him away from their biggest rivals.

We hoped you liked reading Why Million for Yoan Moncada Makes Sense by Dave Cameron!

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Tom
Guest
Tom

I’m curious on how certain they are that he’s really 19 years old. We know that there is great incentive to cheat and that players and organizations will cheat (look at the steroid scandal and the Chicago LL for example). So teams are basically betting on the integrity of the Cuban government and the international baseball federation (or whoever verifies birth certificates) that he is the age he says he is. Doesn’t seem like a great gamble to me and I wonder if that’s the reason why his bonus was much less than people expected.

Richie
Guest
Richie

Given the sound Cuban medical system, I’m inclined to trust their numbers. Especially if in their youth baseball they track their players according to age on their way up. But yeah, if a guy (and all his financial people) can get away with obtaining extra millions of $$$ in return for saying “uh, yeah, sure I’m 21- I mean, 19-years-old then, you bet”, only a bozo doesn’t factor in the possibility.

So, how sure are we as to Cuban ages?

Richie
Guest
Richie

OK, half of that was inane. Only way we confirmed all the guys who were lying about their age was that all their governments DID have that information, just prior to 9/11 had no incentive to give it to us. Said incentives would be in place for the Cuban government too, you’d think.

I’m superficially inclined to go with Jeff below. But you’d think this is something Dave C. could check with his MLB contacts by way of an email or 3. Are MLB teams as a whole confident that the Cuban ages are valid?

Tom
Guest
Tom

I don’t see how they can be confident about their ages. But at the same time there’s absolutely nothing they can do but accept them.

Kanye
Guest
Kanye

If you think it’s more likely he’s two or three years older than his reported age, you have to know that’s just baseless speculation on your part as well. So there’s that.

Jeff
Guest
Jeff

I was under the impression that the age of Cuban players were accurate due to the scrutiny of the international tournaments that they play in. Moncada has played in multiple tournaments. On the other hand, most signed 16 year old players from other Latin American countries haven’t had that level of scrutiny with regards to their age. Or at least that was the case in the past.

Tom
Guest
Tom

I’m sure the ages of Cuban players at international amateur tournaments are accurate – meaning that the names of the players match up with a birth certificate that has them at an acceptable age. However that’s not to say that either the names of the players aren’t correct or that the birth certificates haven’t been doctored in anyway (I suspect the former is more common than the latter). We know there was horrible age cheating in the LLWS (even among the US teams, Danny Almonte). The same thing has been going on in T&F – the Africans routinely cheat on their ages which makes junior athletics a complete joke.

geefee
Guest
geefee

Scrutiny or not, players with that talent level start playing at the highest level at 17, and sometimes even 16. While it’s theoretically possible for Moncada’s age to be falsified, it wouldn’t really make much sense. When would this falsification have occurred? You don’t just lie about everyone’s identity just incase they become a great baseball player, If he was really 19 when he was supposed to be 17, where was he before? People are stuck in the 90s/00s with this shit.

Tom
Guest
Tom

I’m amazed at how little understanding there is about age falsification and how people don’t understand how widespread it is (outside of the US). The Cuban baseball federation isn’t falsifying ages on the slim hope that it will help their players get more money from the MLB but because they want to do well in international youth tournaments. It happens when they are younger – they see a good 14 year old and then get a birth certificate that says he’s 12 (for example). Or when he’s 16 they make him 14. It’s simple and nearly foolproof.

Bill
Guest
Bill

I don’t trust the records of any totalitarian country. I remember North Korea had a gymnast that they claimed was 15 for 3 consecutive years. That being said, this is more than a dictator looking to bask in Olympic glory. I’m sure the teams involved did their homework and didn’t just take Castro’s word for Moncada’s age.

I also think it funny that the finest minds in the industry came up with this system for balancing the playing field when it came to international signings while any idiot with a modicrum of sense could see that this would have the exact opposite affect. I’m guessing these geniuses graduated from the same fine institutions as those that say we can reduce healthcare costs by mandating lower prices.

matt w
Guest
matt w

Thank you for that well-informed and thoughtfully considered political remark at the end, which was completely relevant to the point and not something that you tossed off without actually looking into the issues involved with any depth!

Mark L
Guest
Mark L

I’m sure the socialist government of Cuba is busy, while they’re not desperately trying to keep their own people alive in the face of the American sanctions, flasifying the ages of teenagers on the off chance they become baseball superstars.

Do you have any proof that Moncada is not the age he claims to be? Or is it as strong as your views on healthcare? As a British guy with healthcare paid for from taxes, we laugh at your pathetic, expensive, inefficient system.

Dr. Steve Brule
Guest
Dr. Steve Brule

Any idiot with “a modicrum of sense”?

Bringo! Ya Dingus.

Paul G.
Guest
Paul G.

Totalitarian countries have been known to cheat and abuse loopholes to succeed at international sports and gain the propaganda value of such. Heck, non-totalitarian countries are not immune. If falsifying birth certificates will provide said advantage, it is certainly a tactic that will be used when the perceived gains outweigh the perceived risks. If Cuba is falsifying ages – and I cannot confirm one way or the other but it wouldn’t surprise me either way – they are certainly not going to volunteer that information now. While international sports organizations are known for a certain level of corruption, they don’t like being embarrassed in public and it would be in Cuba’s best interest to keep their mouth shut.

You pays your money and you takes your chance.