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NAGR Gun Rights Blog Gun Economics: Ammo Supply 101


Gun Economics: Ammo Supply 101
Ammo Supply 101, Supply and Demand
BY M. L. MCPHERSON

A DEFINITION, AS APPLIED IN THIS ARTICLE
EXTRA: Above normal product demand, usually for something intended to be stockpiled for that proverbial rainy day.

In 1973, a US Navy procurement officer asked the Navy’s toilet paper provider what would happen if the Navy needed to simultaneously re-supply all ships. The person he asked made some calls to find out how long it would take industry to supply that much EXTRA demand.

Someone involved told some friends the Navy was actually planning to buy a huge supply of toilet paper, warned that this would lead to a temporary shortage, and suggested that everyone should buy a few EXTRA rolls to avoid running out. Each of those persons told several acquaintances that story, each of those told several others, etc. Within days, that story was a nationwide rumor, and everyone knew a shortage was immanent — the ultimate self-fulfilling prophecy.

Within days, a panic run on toilet paper occurred. For months, it was impossible to routinely buy toilet paper. Retailers imposed strict purchase limits. Throughout the country, millions stood in line for hours awaiting delivery just to buy any toilet paper.
Similarly, in the early nineties, some government thug wondered if it would be possible to manufacture ammunition with a limited shelf life. They asked someone in the industry to consider that possibility. Even though doing so was impossible, a rumor spread that shelf-life-limited primers were coming. Shooters and handloaders wanting to stockpile EXTRA supplies created a shortage.

DBI Books asked me to investigate that shortage. I spoke with representatives of every free-world primer manufacturer. Those conversations were most enlightening. Many of those revelations are basic to understanding the current shortages of ammunition, components, and related items.

One of those conversations revealed a fact that will surprise many readers: One of the largest primer producers in the US told me in confidence that his company was making less quarterly profit on primers during the primer shortage than it had made before the panic-driven shortage began.

While it had stepped up production to the extent feasible, its production costs had increased so much that both profit margin and absolute profit had decreased. This really surprised me because retail primer prices had doubled.

Recently, we had a situation that created a similar run on certain guns and magazines. That panic-driven run fizzled out when it became obvious that the underlying, unconstitutional law would expire.

Last fall, the obamination occurred. This event created a panic-driven run on guns and all related items. Unlike the previous panic-driven runs, this run is not based upon rumor or perceived threat; every real American should intuitively understand that this threat is very much, very real.

If you do not believe this, you are part of the problem — one of those who would sacrifice freedom for the illusion of a little temporary safety and, as Benjamin Franklin noted so acutely, you deserve neither.

When will this shortage end? Before I offer a pessimistic partial answer, consider that in 2007 and 2009 the Cortez Rifle and Pistol Club held Gun Shows. In each of those events, we had a similar number of vendors who, in total, displayed a similar number of rifles. In 2007, two M-99 Savages were exhibited; in 2009, I counted 26 before loosing interest. Why such a difference?

In 2007, short of a total economic catastrophe, few would have considered selling a family heirloom; in 2009, many viewed that family heirloom as a source of money with which they could buy something perceived as being far more important (e.g., primers, ammunition, etc.).

When will this panic driven shortage end? Not until panicked people run out of money.

Why does demand-side panic lead to such an obvious and startling shortage of guns, ammunition, handloading components, and handloading tools and why does it increase costs? The answer falls directly from analysis of free-market supply and demand.

Here is the critical fact: Before the obamination, no related manufacturer had the facilities to increase production more than about 40%. Moreover, even if a company did have such capacity, it could not expect to be able to affordably obtain raw materials needed to do so — companies that supply raw materials cannot increase capacity more than about 40%!

Moreover, spending money to add facilities in order to increase production beyond 40% — in response to a special situation that could end any time (one way or another) — is economically foolish. It would not work unless the entire supply chain could support that increase, which is far from certain.

For example, a primer manufacturer ideally runs two production shifts at eight hours per day, five days per week. The remaining time would be used to clean, maintain, and repair equipment, and to do associated work necessary to maintain production throughput.

This situation holds true for all related manufacturers, and applies to manufacturers providing raw materials as well. No glaring supply-side exceptions or variations exist, but variations in degree of EXTRA demand do exist (shortages vary accordingly).

Because practically no stockpile ever exists and because the supply pipeline contains so little of anything, just a few percent EXTRA demand results in an immediate supply-side shortage — exactly what happened three decades ago with the toilet-paper fiasco. If EXTRA demand increases more than about 40%, supply-side shortage will continue indefinitely.

Annual production worldwide for centerfire metallic-cartridge primers is about ten billion. In the US, about five million people have handloading equipment. If each of those persons decides to buy a mere 2000 EXTRA primers “just in case,” EXTRA demand instantly equals worldwide annual production.

Ammunition manufacturers will not stop making ammunition just to coddle handloaders. Therefore, eight of the ten billion primers produced each year will never be available to handloaders. This leaves two billion primers to fill the standing annual demand, which leaves a supply-side shortage of ten billion EXTRA primers.

If manufacturers can increase annual production by 40% up to fourteen billion, then they can produce about four billion of the needed ten billion EXTRA primers. All things being equal, demand-side need for EXTRA primers would disappear in about 2½ years.

However, nothing else is ever equal. Two issues prevent this result. First, demand for EXTRA ammunition exceeds demand for EXTRA primers by twenty times because twenty times as many people in the US own guns as handload ammunition. So, of the four billion EXTRA primers produced each year, not one will become available as a component primer. As a matter of fact, primer manufacturers have twenty times as many customers wanting EXTRA ammunition as customers wanting EXTRA primers. Therefore, as a matter of maximizing goodwill among customers, manufacturers have a twenty-to-one incentive to use all EXTRA primers to produce EXTRA ammunition.

Similarly, if we look at this situation strictly from an economic standpoint: Because the manufacturer can make more profit from ammunition than from primers, any primer it could use to produce ammunition but instead offers as a component represents a money losing goodwill measure.

Keep in mind that a manufacturer is constrained in production of other components, so it might not be able to use all primers in ammunition. However, if it can do so, using all primers to make ammunition is the most profitable approach. This is not a conspiracy; this is a natural consequence of free market economics.

Even if every one of the four billion EXTRA primers produced were offered as a handloading component, it would not matter because most handloaders are not interested in 2000 EXTRA primers — we want 20,000 EXTRA primers. (Really, we do.) And if we had 20,000 EXTRA primers, we would want more.

So when will the EXTRA demand be met so that primer availability will return to normal? My belief is that until the motivation behind the demand for EXTRA primers ends, the answer is likely NEVER.

Consider economics: $10,000 invested in the Stock Market in mid-2008 is now worth maybe $5000; $10,000 cashed out before the obamination and invested in guns, ammunition, and related products is now worth about $30,000. Many have made such an investment for lack of anything nearly as good.

Cost of production has increased but that is not why primer and ammunition prices have increased so markedly since the obamination. Many manufacturers and customers in the chain are engaging in free-market profiteering. Just last month, for example, a friend of mine sold 10,000 primers for eleven cents apiece!

For the foreseeable future, we will continue to face difficult times when it comes to simply continuing to enjoy the freedom to pursue our hobbies.

Similarly, any shortage of any particular component or type of cartridge requires no conspiracy. During a demand-side run, manufacturers that are selling every cartridge they can make of any given type have a significant negative incentive to shut down production long enough to gear up to make some other type of cartridge. Doing so can cost more than $25,000 in lost profits. The best economic approach is to gear up to manufacture the most profitable cartridge types and to continue to produce those until either:

The market is saturated (which will never happen under present demand), or
Something breaks and requires retooling.
If you were running Remington’s centerfire metallic ammunition factories, and if standing orders for 9mm Luger and 5.56mm NATO (223 Remington) rounds exceeded production capacity, what ammunition types would you produce? So, the next time you cannot find a box of 380 ACP, remember the law of supply and demand. Conspiracies need not apply.

Whose fault was the toilet-paper shortage? A foolish rumormonger.

Whose fault was the first primer shortage? A foolish rumormonger.

Whose fault was the gun and magazine shortage? Politicians and those who voted for them.

Whose fault is the current shortage? We–the–People — for continuing to support those who conspire to take our freedom. We–the–People got exactly what we wanted, and We–the–People got exactly what we deserve.

Never forget that any vote for the lesser of two evils is also an explicit endorsement of evil — consider how Jesus would view such behavior.

Mic McPherson is author of the best selling gunsmithing manual “Accurizing the Factory Rifle”, an avid shooter and instructor, and regular firearms writer. He lives in Southwestern Colorado.

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AR. CHL Instr.

To compel a man to furnish funds for the propagation of ideas he disbelieves and abhors is sinful and tyrannical. Thomas Jefferson

Bark'n

HotGuns... I must say that was a very interesting read!

Thanks for posting it. I think it will open a few eyes. But there will also be those who will try to pick every bit of it apart.

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-Bark'n
Semper Fi

"The gun is the great equalizer... For it is the gun, that allows the meek to repel the monsters; Whom are bigger, stronger and without conscience, will prey on those of us who without one, would surely perish."

Janq

Ditto. ^^

I will be passing this along to others, and thank you for providing a _source citation/link_ as well!

- Janq

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"Killers who are not deterred by laws against murder are not going to be deterred by laws against guns. " - Robert A. Levy
Monday, March 12, 2007 -- Op Ed -- The Washington Post

HotGuns

Providing a link IS the gentlemanly thing to do.



I posted it because it was an opinion of which I hadnt heard, yet it does appear make sense. I knew before hand that some would more than likely dispute it, but that's OK too, hopefully in the end we can all learn something from it.

__________________
AR. CHL Instr.

To compel a man to furnish funds for the propagation of ideas he disbelieves and abhors is sinful and tyrannical. Thomas Jefferson

nutz4utwo

I don't buy some of those arguments. Manufactures loose money by making and selling more of their product?

If there were true raw material shortages, we would see increases in the wholesale prices of copper and zinc (used to make brass), lead, and various chemicals for the primers and powder.

http://www.kitcometals.com/charts/co...cal_large.html

The sky is falling! The sky is falling!

There are some shady economics at work... sorry to dispute it, just my opinion. Certainly worth reading

Bark'n

Well I haven't checked the markets recently because everything has been too expensive for me to trade these days, but in the last 3 years, Copper was at an all time high in the futures markets.

I was trading at the time when the margin on Copper contracts started to go up out of my price range and the options were almost in line as the contract margins. So I'd say there may have been a small Copper shortage.

I haven't checked Copper prices in the last year to see how much they have come down though.

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-Bark'n
Semper Fi

"The gun is the great equalizer... For it is the gun, that allows the meek to repel the monsters; Whom are bigger, stronger and without conscience, will prey on those of us who without one, would surely perish."

HotGuns

I do know that the the price of metal has really gone up in the last couple of years. China has been buying everything that they could get their hands on. Its a supply and demand thing, and those that have it will sell to the highest bidder.

__________________
AR. CHL Instr.

To compel a man to furnish funds for the propagation of ideas he disbelieves and abhors is sinful and tyrannical. Thomas Jefferson

nutz4utwo

Yup. Industrial metals seemed to gain value through 2006 or 2007. With the economic slowdown caused by the housing/bank crisis, the prices fell drastically. Things have picked up a bit since then.

The copper use in the firearms industry is fairly small compared to the industry as a whole. Wire and plumbing use a lot more. Tying ammo production to wholesale availability of raw materials is a little dubious to me.

I think a big chunk of the cost of primers and ammunition goes into liability insurance and paying lawyers...

Ram Rod

Excellent post! Good read.
I'm part of the metal industry. Cold, hard steel. Hoping we forge into the future like we've done in the past. Back when things were good. Now economics is just a school of thought.

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RamRod-----sans remords
live, eat, breathe, sleep Glock

HotGuns

Smile a little RamRod...
it aint that bad...









yet...

__________________
AR. CHL Instr.

To compel a man to furnish funds for the propagation of ideas he disbelieves and abhors is sinful and tyrannical. Thomas Jefferson