I am as shocked as anyone by the price of ammunition today and I have heard a dozen reasons why it is more expensive. Everything from COVID to demand verses supply, to material cost, to price gouging. But no one seems to agree on why the cost has significantly increased. As someone that shoots 200 to 400 rounds a week, I have had to cut back. Like everyone, I am waiting for the price to decrease back to near normal. However, curiosity had me dig into this.
First off is Covid. Yes Covid did impact the manufacturing of ammunition just like it did every other market. So, why are we not being charged 3 times as much for everything else?
There are those that point to demand verses supply. This may have set off the increase, but it is only the tip of the iceberg. I can find ammunition easier than toilet paper. The cost for toilet paper has not triplet, but ammunition has. Yet it is readily available if you want to pay the price. I doubt anyone reading this will argue that they cannot find ammunition online. Google ammunition sales and I will bet you dollar to donuts you can find the ammunition you are looking for, but at an increased cost.
So, are the commodity prices driving this price increase. Has the price of lead, copper, brass, charcoal, potassium nitrate and sulfur increased? Not really. I looked at a 5-year summary of each of these commodities and I just see normal trends in each of them. The hardest one to track was potassium nitrate, because it is not listed. I had to rely on the price of fertilizer for my analysis. My research did find that the cost of fertilizer has significantly increased since January 1st of this year. That will soon be reflect in the cost of groceries. I was not able to find a market index for charcoal, but I do buy it and it has not gone up by three times.
Basically, there was no surprise increase in any of these that reflected a significant price increase in 2020 when I looked at a 5-year history.
So, we are being price gouged. We must have it, so the manufacturers can ask any price they want, and we will still buy it. We may buy it in smaller quantities but spread that out over all of the new gun owners and the manufacturers can still sell what they produce.
Why has the price increased?
First off, the ammunition market is an oligopoly, which means it is a market shared by a small number of producers. In this case there are 3 primary corporations manufacturing ammunition. They are listed in the stock market as: VISTA, OLIN and POWW.
To simplify this discuss let us focus on a market with just two kids selling lemonade. The cost for making a glass of lemonade is $0.50 for each. Both offer the same quality. One sells for $0.60 a glass, and the other sells for $0.55 a glass. It would be a reasonable conclusion that you would rather pay $0.55. It would also be reasonable that the kid selling for $0.60 would have to lower his price or implore some magical marketing scheme. Magic is out, so he drops the price.
Now is where it gets difficult to understand but bear with me. Two kids are selling lemonade at $0.55 a glass, but the cost to make the lemonade increases to $0.60. Neither kid wants to increase their price for fear of losing the business so they keep their cost low hoping the other kid will lose interest and leave. If successful, the kid now owns the market. But what if the other kid has the same idea. Both are now selling at a loss hoping the other one leaves the business.
So, what does lemonade have to do with ammunition? There are three manufacturers. Each competing for our business. One wants to win. In doing so, they are willing to take a loss to drive the others out. But it is not happening. The other two have the same concept. Then along comes an increase in guns sales and a demand for ammunition. If just one increases their price the other two will follow because they cannot stay in business by selling at a loss. The reason for the price increase is an increase in demand.
To put some teeth into this discussion all three manufacturers have been operating at a loss for a few years now. You can check their past earnings by reviewing their stock portfolios. One of them flinched and raised their price. The other two followed and increased their price higher. Eventually we are now paying much more than we did for ammunition.
The bottom line is not about shooting. It is about maximizing the shareholders wealth. The stock in these 3 companies has gone up by a factor of three.
Will it stay this expensive? I think so unless commodity prices drop a lot. What if one manufacturer drops their price again? Well, the answer should be obvious. The other two would maintain their price and eventually the one that dropped their price would be out of business.
Stay focused on the estimated earnings per share for 2021 for each of these manufacturers. If they show a positive earning, then probably the price has stabilized. But if they are negative then expect the cost per round you put down range to increase.
I am off to buy some lumber now…