I'd trade the saddle for him.
Though he'll be more expensive to keep than trading for another saddle.
And you have to wonder, why is this person breeding if she is basically giving away this year's stock? I know it sounds mean to say, but if you're not breeding for quality, you shouldn't be breeding...and trading a horse for an inadament object is basically admitting you don't have quality to bring in any actual money with breeding and sale.
To be frank, I do think he is of some quality. I like what he has now, and it can only get better. He'll be an expensive trade but I would do it. I'm just kind of flabbergasted at some breeders, is all.