In the highlands of Jalisco, Mexico’s largest tequila-producing region, some growers of agave, the spirit’s base ingredient, are fearful of committing to another seven-year planting cycle after a significant drop in price for the cactus-like crop.
Spirits makers have struggled for years to secure enough agave as tequila demand surged to record highs in North America. Consumption soared even higher during the coronavirus pandemic when locked-down consumers splashed out on higher-end tipples, and again during the ensuing recovery when they burnt through their savings.
But over the past six months supply has caught up with demand. Agave crops that were panic-planted as thirst for tequila mounted are coming to maturity just as growth in the US has started to moderate.
“The biggest risk we see is that ‘agaveros’ will come out of planting for the next five years ahead,” said Dave Ingram, chief supply chain officer at Bacardi, which makes Patron, Cazadores and Corzo tequila.
“They will look at today’s price and ask if they should plant something else that is going to give a short-term higher return than agave,” he added.
The price of agave has dropped from highs of 31 pesos ($1.83) per kilo six months ago to as low as 10-15 pesos a kilo now, according to industry experts. Sales growth of premium and super premium tequila in the US, meanwhile, has slowed from highs of 25 to 45 per cent in the first half of last year to 5 per cent growth in the same period this year, according to drinks research provider IWSR.
“As soon as there were signs of the US tequila market slowing down growth, there was a lot of speculation among agave growers,” said José Luis Hermoso, research director for Central and South America at IWSR.
“Large brands were not buying any more, so everyone was waiting . . . for the price to come down. It was inevitable in a way.”
In the US, international drinks giants Diageo and Bacardi dominate the industry alongside Mexican spirits group Becle, which makes Jose Cuervo and 1800.
Tequila represented approximately half of US spirits growth in 2022, winning share from the likes of vodka, whisky and cognac. Diageo, in particular, has benefited from the tequila wave, with the spirit contributing more than half its US growth over the past six years, according to analysis by Jefferies.
Bacardi buys 70 per cent of the agave for its tequila brands on five- to seven-year contracts. The group has 1.5mn tonnes from 30,000 hectares worth of agave contracted with roughly 28 partners.
“The main thing we’re doing right now is making sure that people are still confident about the industry for the long term,” said Ingram, adding that while there was a softening in demand in the US, there was a big opportunity in the rest of the world.
Diageo’s CFO said in a recent investor call that it had a “mixed model” to how it procures agave: the spirits maker owns its own crops, contracts with farmers to grow on its behalf, and buys agave on the spot market.
As the supply of agave stabilises, manufacturers will have more capacity to allocate stock for markets besides the US. But some in the industry doubt that tequila can resonate in other markets like it has in North America, where the eating and drinking culture has heavy Hispanic influence.
“European consumers are well behind US consumers because there was no need to develop these markets,” said Hermoso. “Any percentage the US doesn’t grow is a lot of tequila to be sold elsewhere. Whether that demand exists in Europe is yet to be seen.”
Demand in the US has been driven by high-end tequila, for which consumers developed a taste after steadily trading up from the kind of tequila they ordered as shots during college to pricier and pricier “sipping” varieties.
Europeans have yet to be taken on this “laddering” journey, said Hermoso, or to develop the flavour nuances of different tequilas. Until they have, he said, the demand will never match that of the US.
The slowdown in tequila demand has led to a fundamental shift in agave market dynamics.
Hermoso said there was no official commodity price for agave, and that the power to negotiate the price had shifted from growers to tequila producers as supply stabilised and drinks groups moved to secure their own crops with an integrated supply chain.
Growers “don’t have collective bargaining power”, said Hermoso. “Bigger players have gone in and secured larger tracts of land to secure their own supply. That has a big impact on availability.”
Aligning the supply and demand for agave has always been one of the industry’s big challenges, according to Martin Muñoz, technical commissioner at Mexican industry body Consejo Regulador del Tequila.
The first crisis came between 1997 and 2001 when prices shot up to 16 pesos per kilogramme before dropping to 1 peso per kg between 2006 and 2008.
Muñoz said no one had a “crystal ball” to know where the price would go. The regulator is now trying to promote long-term contracts, cut out intermediaries — known as “coyotes” — and working to prevent growers abandoning their crop, or even worse outcomes.
“When there is oversupply of raw materials . . . eventually there can be protests or social conflict,” he said, adding that today’s price fall had not reached the point of difficulty yet.
The CRT said it had not seen cases of crops being abandoned in its register, which growers for tequila are required to update.
However, David Suro-Piñera, owner of small-batch producer Siembra Spirits, said he was in the highlands of Jalisco last month and already noticed some agave fields not being cared for properly.
“This is only three months into this dramatic decrease in prices. I can’t imagine what it’s going to be in a year.”
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