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    The Cost of Making a Penny: Production Expenses vs. Face Value

    How Much Does It Cost to Make a Penny?

    The penny doesn’t get much credit these days. After all, as the dollar inflates, the value of the penny continues to fade into irrelevance.

    In fact, latest reports pin the cost to make a penny at 3.07 cents. So, making a penny costs more than 3 pennies. The main portion of those costs resides within the actual material costs. Copper is expensive, but makes up only 2.5% of each coin.

    The Mint lost $179 million in 2023 in its production of the one-cent piece and a debate rages over whether the penny should remain in the system. The real problem is that zinc, the other part of the alloy, is not the cheap metal it used to be.

    Since the penny does not appear to be leaving us anytime soon, let’s discuss the production process, the history, and the arguments for and against the presence of the humble penny in circulation.

    The Penny Production Process

    First, let’s talk about what goes into each penny the US Mint produces.

    Despite their appearance, current pennies have very little copper content. They are primarily made of zinc (97.5%), but are plated with copper (2.5%) to maintain their reddish-brown color. They have maintained this composition since 1982.

    Until the change in October 1982, pennies were always made almost entirely with copper (with one exception). However, rising copper prices made the copper composition untenable in terms of cost, so the US Mint basically flipped the composition on its head.

    How Pennies are Physically Made

    Pennies are created with the same procedure as the other coins in circulation in the US. The procedure contains six steps, as follows:

    • Blanking – The US Mint takes prepurchased rolls of zinc/copper alloy, straightens them out, and punches out blank discs in the correct size for a penny.
    • Annealing – A 1,600-degree oven heats the blanks in order to make them softer and easier to shape.
    • Washing and drying – The annealed blanks are washed to restore their original color, then dried before moving to the upsetting step.
    • Upsetting – The upsetting mill squeezes the edges of each blank in order to create a rim and seal them.
    • Striking – A press exerts up to 100 metric tons of pressure to emboss the pennies with Abraham Lincoln and all the other images familiar on a penny.
    • Bagging and packaging – Finally, the new pennies are placed in large storage bags or in smaller packages and shipped around the country to the various Federal Reserve outlets for distribution.

    The US Mint has four different facilities around the country where it produces pennies (and other coins). There are production facilities in Philadelphia, Denver, San Francisco, and West Point.

    Altogether, parts and labor for each penny account for about 88% of the costs. The remaining cost is required for distribution and administrative costs, as it’s not free to manage all of these coins and send them to the correct places around the country.

    Factors Influencing Production Costs

    We’ve already touched on the fact that the raw metal prices contribute to the rising cost of producing pennies against their face value. To be sure, inflation is also playing a part in this issue – metal costs more because everything costs more, but the penny retains its one-cent value regardless of inflation or the economic conditions present.

    There are a few ways that the US Mint might be able to trim some of the costs out in the near future. One of those might come in the form of technological advancements in minting. Although the process above is a modern one, it is still rather capital-intensive. One possibility might lay within 3D printing, but the current incarnation of 3D printers aren’t there yet.

    Another possible avenue for cutting the production costs is within the volume of pennies produced. As is the case with most products, it is sometimes possible to create economies of scale in the process, where it costs less to produce each penny, but more pennies are made.

    For instance, it might help to streamline the production volume in order to produce exactly the number of coins that purchased rolls of metal allow. Recycling the unused pieces of metal into new batches might also create greater efficiency with the process.

    However, according to the most recent annual report from the US Mint, production of pennies is in decline as a percentage of coins produced. So, economies of scale might not be a goal for the US Mint at this moment in time.

    Economic Implications

    Although the cost of producing a penny is measured in cents, the reality is that producing billions of pennies is expensive.

    So, it’s no surprise that there is a growing call from both members of the public and lawmakers to discontinue the penny as a coin in the US system. Opponents argue that, in addition to the unwieldy production costs, the penny causes wasted time for both merchants and customers to use – and wasted time means lowered productivity within the economy. Some even worry about the health risks presented by exposure to zinc – especially to children and pets.

    However, others argue that eliminating the penny and rounding transactions up would negatively affect the poor disproportionately. After all, if money is tight, the differences between one cent and five cents (or ten) add up quickly to result in lower purchasing power and a lowered quality of life. Besides – a significant percentage of the American public thinks the penny is an important part of our history.

    Alternatives and Proposed Solutions

    In the face of the growing challenges affecting the penny, there are a few alternatives that might be worth consideration soon.

    As we mentioned above, some argue that it would be a better use of money and time if all transactions in the US were mandated to round to the nearest nickel, rather than the nearest penny. Another option – and one to which the US Mint is always predisposed – is to find a different composition for the penny. One option may lie in steel, which already stood in for the penny’s copper composition in the 1940s.

    One last alternative may be with cryptocurrencies, which have presented an alternative form of payment to cash across the board, including for pennies.

    International Perspectives

    Were the US to move to eliminate the penny, it would not be the first country to discontinue a low-denomination coin. In fact, several of our top allies have done so in recent times.

    Canada has been without its penny since 2012. The UK hasn’t offered the halfpenny of the pound sterling since the 1980s. Australia and New Zealand have also discontinued their low coins, although they have not agreed with each other about the status of these coins as legal tender and whether to make a mandatory rounding decision.

    In the case of the Canadians, the penny met its demise due to rising production costs – 1.6 cents for every penny produced. In other countries, inflationary pressures reduced its low-value coinage to irrelevance for the consumer. At the end of the day, these concerns are all part of the same issue – the face value of the coin does not increase as its production costs do.

    Conclusion

    The war over pennies is far from over. There is a certain amount of nostalgia and tradition wrapped up with the coin, as it has been part of the mix since the early days of the US.

    However, as inflation makes the dollar (and its cents) worth less each day, the penny buys fewer things. It’s not just that they cost more than 3 cents to make – they don’t buy very much, either.

    In the end, the US has shown a propensity to hold onto certain things longer than advisable. After all, Canada pulled the plug on the penny when its production costs were half of ours, but we keep chugging along with penny production.

    For 19 years, a penny hasn’t been worth the metal it’s printed on. Unfortunately, the US government has a systemwide habit of ignoring costs, so don’t expect changes anytime soon.

    All Market Updates are provided as a third party analysis and do not necessarily reflect the explicit views of JM Bullion Inc. and should not be construed as financial advice.