The Bullet Bubble: Is Ammo The Next Bitcoin, Or Gold In The 1970s?

Forbes

LAS VEGAS, NV - JANUARY 17:  Riley O'Bryant (L...
Looks like fun. Where's the ammo? (Image credit: Getty Images via @daylife)

Try going to your neighborhood Wal-Mart to buy some .22 bullets for target shooting, or a couple of boxes of shotgun shells, and you'll discover what hunters and gun enthusiasts have been muttering about for months now: The shelves are bare.

Manufacturers are operating flat-out but can't keep up with demand, as consumers snap up every box of ammo as soon as it comes on the market. Wal-Mart limits buyers to three boxes when they're available, and Cabela's is limiting online orders to one box per day of the popular .22 long shells increasingly used as cheap ammo for target rifles and pistols.

The buying frenzy  is understandable here in Connecticut, where the General Assembly recently tightened gun regulations in response to the Newtown school massacre. The new law includes a  $35 permit to buy ammo that requires a background check and is good for five years -- until the legislature decides it can shorten the term and increase the fee as a new source of tax revenue.

But why the national shortage? Here's my theory: Bullets are easy to store, non-perishable, and they hold their value or even increase in times of crisis. So they're a lot like gold or any other commodity that has served as hard money through the ages (or even the canned mackerel fillets that serve as currency in U.S. prisons, according to  this classic 2008 Wall Street Journal story). With states like Connecticut and Colorado passing strict new restrictions on gun owners and the President flying around the country to drum up support for national gun control, ammo buyers are like consumers queuing for gas or loading up on gold in the inflationary 1970s. They're creating their own shortage.

Like gold and canned mackerel, bullets are used for purposes other than storing value, but they also could be vulnerable to hoarding-induced speculation. All those silly Internet posts about the government buying trillions of bullets, which some see as a backdoor form of gun control, are one source of upward pressure on demand and prices even if the underlying premise is false (the government never purchases the amounts it puts out in requests for proposals). And the threat of stricter controls on gun and ammo purchases is the equivalent of the psychological warfare the Federal Reserve is waging on fixed-income investors with its well-publicized purchases of $80 billion a month in mortgage-backed securities. The Fed is driving up the price of bonds -- and potentially driving down the returns for people who hold them long-term. Are bullet owners running the same risk? This helpful FAQ from ATC's Federal Premium unit says bullets have a shelf life of about 10-years, meaning eventually the ammo that doesn't get shot or sold will have to be disposed of some other way.

It's difficult to get precise numbers on how many bullets are sold in the consumer market in the U.S. each year. The Treasury's Alcohol and Tobacco Tax and Trade Bureau (split off from the ATF a decade ago, not that anyone noticed) collects an 11% tax on ammo sales by manufacturers. That tax serves as a rough proxy for demand, and government statistics show receipts soared from  $68 million in 2000 to $129 million in 2008 and $172 million in calendar 2009, President Obama's first full year in office. That would imply wholesale bullet sales of about $1.6 billion, or possibly retail sales of $3 billion. Consumer retail purchases of clothing and footwear last year, by comparison, were about $327 billion according to the Bureau of Economic Analysis.

It turns out 2009 may have been a high-water mark for ammo sales, since TTB statistics show tax receipts fell to $157 million in 2012 (the final number might be amended as manufacturers submit their final returns). Overall taxes on firearms and ammo have climbed over the Obama years due to rising gun sales, with the TTB's total take rising from $454 million in 2009 to $493 million last year. In the fiscal first quarter ended Dec. 30, the combined taxes on firearms and ammo climbed to $158 million, possibly implying a record-breaking $600 million fiscal year.

(Another aside: The TTB takes in $23 billion a year in taxes, making it the third-largest U.S. tax agency and probably the most efficient, generating $449 for every $1 it spends. The gun and ammo taxes are forwarded directly to the Fish and Wildlife Restoration Fund.)

Will today's ammo hoarders be rewarded like gold buyers in 1972, or will they wind up like the folks who bought Bitcoins at $30 and watched them fall to two bucks a couple years ago? (The current price, readers note, is above $200 in what some are calling a speculation-induced bubble.)

Let's look at the dynamics: A certain number of bullets are fired on shooting ranges, hunting preserves and street corners every year, although statistics are hard to find. But it's hardly a growth industry. The U.S. Fish and Wildlife Service's 2011 survey of fishing and hunting shows there were an estimated 13.7 million hunters who spent $34 billion on the sport. That's down from 14 million hunters who spent an inflation-adjusted $31 billion in 1996.

Michael Bazinet of the National Shooting Sports Foundation, an industry trade group based in Newtown, Conn., says the shooting market may be expanding thanks to an influx of new buyers including women. A 2011 survey of retailers found they reported 25% of their customers appeared to be new gun owners, Bazinet said, and the most recent Gallup poll found that 47% of Americans reported having a gun in the home.

"The demographic is spreading out," Bazinet said, and gun ranges "are busier than ever."

I called a few ammo manufacturers to get their views on future supply and demand, but they're press-shy in the wake of the Newtown shooting tragedy. Olin Corp. is one of the biggest U.S. manufacturers of civilian ammunition, generating about a third of its revenue from bullets. Olin's Winchester division is in the midst of a $110 million upgrade of its ammunition business, in which it is centralizing its operations in Oxford, Miss.

Once the upgrade is done, Olin says in its most recent 10-K, it will reduce Winchester's annual operating costs by $30 million. "Winchester expects to have the most modern centerfire ammunition production facility in North America," the company says.

Ammunition has been a good business for Olin lately, with total sales rising 8% to $618 million and profits climbing 46% to $55 million. The company's commercial backlog, most of it for civilian ammunition, has also soared from $38 million at the beginning of 2012 to $311 million as of Jan. 31. The company's shares are up 25% this year.

Federal Premium answers its own question, "why can't you just make more ammunition?" by saying it is already running its plants 24 hours a day. The company also says "there is some indication now that the shortages may be easing, aided in part by retailers' decisions to limit sales to each customer." Parent ATK, which has a large defense business, is up 17% this year.

How long will the shortages last? Given flat hunting participation, and assuming there hasn't been a step-change increase in target shooting in America, the hoarding will have to come to an end sooner or later. Consumers will run out of room to store the stuff. Olin projected in its 10-k that supplies will be tight "at least into the third quarter of 2013."

By then the Olin's 1,000-employee, 500,000 square-foot plant in Oxford should be humming. Will the guys who stuffed their garages with cases of Super-X Power Points and .38 magnum loads then be looking at it all and wondering, what have I done? Can I really shoot all this stuff?

(Note to more technically inclined readers: The .38 Magnum is properly speaking a .357 load. The .22 long is formally known as .22 LR, for long rifle. I didn't mention semiautomatics but they've been around at least since the original Browning humpback Auto-5 that came out in 1900. Other slang or shorthand in the above story does not indicate a lack of knowledge about the topic. Carry on)

 

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