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The decision to use non-agave sugars (usually cane sugars) in fermentation along with those from the agave was made in the 1930s, a fateful move that changed the industry and affected its reputation for decades. By 1964 distillers were allowed to use 30% other sugars, which soon climbed to 49%.The blander product, however, was more palatable to American tastes and helped boost export sales.
Updated May, 2011
Recent Tequila News
The recession of 2008-2009 seriously hurt domestic tequila sales, going hand-in-hand with the drop in tourist visits to Mexico. According to the CRT, here are the sales (in millions of litres) for tequila over the past five years. Totals first, then 100% agave tequilas after. You can see the growing trend hits the recession, with production falling quite abruptly:
There was a real spike in 100% agave production in 2007, one of the years the Blue Agave Forum members were on tour in the region. Could there be any relationship between the events?
Yet 2009 was not all bad news. Here are the same years' figures for export sales (totals and 100% agave tequilas):
You can see that, while exports overall dropped minimally, 100% tequila sales actually rose. Of the 134 million litres exported in 2009, just over 108 million litres went to the USA, of which 34.7 were 100% agave (the majority of the exports of that type). What is equally interesting is that, the recession notwithstanding, the domestic market for 100% agave tequilas has blossomed in Mexico and represents almost 75% of the consumption (up from 70% in 2005).
In that same period, agave demands have grown, fuelling an increasing demand. Here are the amounts used in production (millions of tonnes) total and for 100% agave tequila:
You can see that production of 100% agave tequila consumes more resources than mixto tequila.
Tequila companies have become hot for investors, too. An article on Motley Fool, a popular investors' advice site, gave the following advice about the white-hot tequila market for investors:
The most popular tequilas by sales are Jose Cuervo, which is distributed by Diageo (NYSE: DEO), Sauza from Fortune Brands (NYSE: FO), and Brown-Forman's (NYSE: BF.A) recently acquired Casa Herradura. Other distributors have tequilas, though they may not be as well known. Constellation Brands (NYSE: STZ) sells three different types under the labels of Montezuma, El Toro, and Capitan. Apparently, a reference to something Mexican is important in marketing your tequila.
So many brands, so little time
For my money, the one to watch here will be Motley Fool Income Investor recommendation Diageo. Jose Cuervo had a market share of 43% in 2005, according to Impact Databank, and it's also been one of the first to market with brand extensions like flavored tequilas, which allows for greater sampling of the liquor. Cuervo has also brought out new and innovative marketing campaigns. For example, it has partnered with Spanish TV giant Telemundo to film a telenovela -- a Spanish-language soap opera -- on the grounds of its distillery. While Sauza will also be featured, it exposes both brands to large numbers of Hispanics who watch these shows not only in Mexico and Latin America, but also throughout much of the U.S. Cuervo also runs a number of tequila bars called Taberna del Tequila that are set up in airports around the country and run in conjunction with HMSHost. Jose Cuervo, through Diageo, is a market leader in many ways besides sales.
While Diageo sells at a slight premium to both Fortune Brands and Constellation, it is discounted against Brown-Forman. It has a tough-to-beat distribution network similar to the exclusivity enjoyed by Anheuser-Busch (NYSE: BUD), owns a portfolio of "global priority brands" including Smirnoff vodka, Captain Morgan's rum, and Bailey's Irish cream, and continues to enjoy growth both here and abroad.
Now that's something to sing about.
Diageo is a recommendation of Motley Fool Income Investor. Anheuser-Busch is a recommendation of Motley Fool Inside Value. A 30-day trial to either allows you to take a sip of all the market-beating recommendations at no cost. Bottoms up!
A similar comment was made in an article at Just-drinks.com:
The US Tequila category continues to show strong growth, while the premium Tequila sector is booming, making it a highly attractive investment opportunity for major spirits companies."
Tequila consumption doubled between 1985 and 1998, bucking the industry trend that saw spirit sales generally sliding. Between 1994 and 1998 alone, tequila sales grew 31%. Then the shortage hit.
In 2005, Herradura reported sales of about $200 million, selling 380,00 cases of its Herradura brand, and 1.4 million cases of its El Jimador brand. That made it attractive to Brown-Forman, which bought Tequila Herradura in January, 2007, for $776 million. Also in 2007, Brown Forman also bought the remaining interest in Don Eduardo, ending an eight-year-old joint business venture with Tequila Orendain. The production of Don Eduardo will move to the Herradura plant, which can process a far larger quantity, and which suggests this premium tequila will be promoted more as the company's flagship brand in the next few years.
Jose Cuervo, the largest tequila producer, with an estimated 43% of the world market share, and the eighth largest distilled spirits brand in the world, has seen growth of 15% since 2003.
In 2003, the CRT's announced plans to bottle mixto tequila only in Mexico instead of allowing bulk shipments, created a furor among American re-bottlers. Mexican officials responded they were only trying to maintain tequila's integrity as a product:
Some 83% of the tequila consumed in this country is shipped
in bulk from Mexico and then bottled in U.S. plants.
However, opposition from both American and Mexican firms quickly squashed the proposed new regulation, and the 2005 NOM was rewritten.
In 2004, tequila sold 8.7 million nine-litre cases in the USA, an 8.3% increase over 2003, and worth $3.3 billion USD. 2006 sales are even more dramatic: a 12.5% increase, according to A.C. Neilsen Enhanced Liquor Track.
Tequila - or rather the tequila-producing regions - are on target to be a new tourist draw for Mexico, a combination adventure, eco and authentic tour. In 2006, The Inter-American Development Bank provided a $1.5 million grant to develop the "Tequila Trail" in the municipalities of Santa Cruz/Magdalena, Amatitan, Arenal and Tequila. That money was matched by local funding, and the Tequila Regulatory Council planned to create a $1 million microcredit fund and a $2.5 million investment fund to assist small and medium-size enterprises.
In 2006, the federal agriculture secretariat (Sagarpa) provided 59 million pesos in compensation for farmers hoarding low-value agave. Even with the help from Segarpa, the glut is expected to last until at least 2009, according to the Jalisco Rural Development Secretariat. Similar negotiations for compensation are ongoing in mid-2007.
2006 was a banner year for tequila, breaking all previous records. The
global success of continued, its growth posting records in both production
and exports in 2006, according to the CRT. Mexico exported 140 million
litres of tequila in 2006, a 19.65% increase over 2005.
In January, 2007, the Mexican government unveiled a plan to give agave
growers another 200 million pesos. The price of agave in January was around
one peso per kilo, where it had been for several years after reaching as
high as 16 pesos per kilo in the late 1990s. On our tour, in April, 2007, we
learned the going price had dropped to $25 USD (250 pesos) per tonne!
But the millions of agaves planted a few years ago are now maturing, faster than the world can drink the tequila they already have. So farmers are turning back to traditional cash crops - including corn because demand is rising thanks to the growth in ethanol and other bio-fuels. In 2007, this author saw some fields where the agave crop had been ploughed under or burnt rather than harvest it. And as a result, the base material, the agave gradually falls to low supply. A story in Reuters News, May 29, 2007 said,
Mexican farmers are setting ablaze fields of blue agave, the cactus-like plant used to make the fiery spirit tequila, and resowing the land with corn as soaring U.S. ethanol demand pushes up prices.
The switch to corn will contribute to an expected scarcity of agave in coming years, with officials predicting that farmers will plant between 25 percent and 35 percent less agave this year to turn the land over to corn.
"Those growers are going after what pays best now," said Ismael Vicente Ramirez, head of agriculture at Mexico's Tequila Regulatory Council.
Many growers have started to abandon the crop in favor of corn, whose price has rocketed in line with massive growth in U.S. demand for ethanol after President George W. Bush outlined targets last year to use the corn-based fuel as a gasoline alternative.
Agave supply is also being hit this year by disease in the fields, partly due to farmers caring less for the plants after prices dropped.
"The problem that we are going to see, perhaps by mid-2008, is that a lot of agave is sick," Agriculture Ministry official Arnulfo del Toro said. "That will have to be taken out and production is going to drop a lot."
Tequila aficionados don't have a lot to worry about yet. The fields on fire are those of small, independent growers, many of whom decided several years ago to cash in on the 'blue gold' that agave promised to be, only to find out everyone else had jumped on the bandwagon and driven prices to rick bottom. The major producers have their own fields, and they're not burning anything. In fact, many are carefully storing away tequila for just this sort of event.
The blue agave is only one victim of the corn craze, according to a report in the Christian Science Monitor from June 21, 2007:
Agave is not the only casualty of the corn-based ethanol craze. Mexican beans, potatoes, rice, and barley have all been mowed over for corn, a crop whose origins reside in ancient Mexican lore but has long been associated with poverty: corn farmers who can't compete and head north, Mexicans who can afford nothing but.
And what if a national symbol, the agave, were to
When the inevitable shortage happens around 2010-12, agave prices will skyrocket as they did in the late 1990s and early 2000s. That will encourage farmers and entrepreneurs who see the potential, to plant more agave in the hopes to reap the profits in another eight to ten years... or see another glut and falling prices.
Despite a glut of agave in 2007 and record low prices, we're paying today
for tequila that was started at least eight years ago, possibly longer. The
glut today doesn't affect agave prices 8-10 years ago. Plus over those years
other costs have risen: wages have risen, fuel and electricity costs have
risen... and the cost to make a single bottle of tequila from agaves planted
back then has not gone down as a result of today's glut.
Other recent news includes the challenges to tequila from producers of agave spirits in
South Africa, and from the
USA. These are covered in the national pages under the culture menu.
During the shortage, producers faced with a lack of agave tried to compensate by making reposado and añejo mixtos. While these are proper aging types, and might be legitimately applied to mixtos, they are more traditionally associated with pure 100% agave tequilas.
However, the prices of these new mixtos do not reflect the contents: they are generally priced to match many 100% agave tequilas, in the medium-to-high price categories, which means they are basically aimed at the tourist because that puts them well outside the average Mexican’s buying power.
This trend towards aged mixtos creates confusion in the market place over what is a mixto and what is a premium product. However, there may also be a trend towards better mixtos - some producers have increased the amount of agave sugars above the obligatory 51%.
There is also a trend towards fancier bottles. While tequila makers have always had a flair for marketing and produced some of the nicest and most flamboyant bottles around, the number seems to increase every year.
However, on closer inspection I found that many of the fancy bottles
housed mixtos - an obvious attempt by the producers to distract the unwary
consumer from the contents by elaborate packaging.
Negotiations re underway between produces and the agave growers' union, with the CRT acting as intermediary, to get producers to buy some of the excess agave, beyond their production needs, to keep the growers in business. Some of the larger companies have already purchased extra agave, but not enough, say growers, and producers feel pressured to buy at unfair prices.
A story in the Chicago Tribune in late June, 2007, carried some more bad news for agave growers:
The oversupply has caused (agave) prices to tumble to less
than $4 per typical 90-pound plant, from a peak of $70. Agave farmers are
going bankrupt, even burning their crops in despair. Some farmers have
blockaded tequila distilleries, begging them to buy their plants before they
rot away in the rugged fields of Jalisco state.
To bring order to agave production, the Mexican industry
last year began requiring farmers to register their crops. Officials hope
they can then warn prospective farmers if the market is likely to be
saturated again in seven to eight years.
Recent new stories and blog posts have been telling how biofuels are affecting traditional crops and food chains around the world. Some of us on the last tours saw evidence of agave fields being burned or plowed under to make way for other crops - corn in particular. I wrote about my concerns after our 2007 tour and made it a focus of our 2008 tour to try and document the change.
And a related story on
ZAPOTLANEJO, Mexico ? Here in the heart of Mexico's tequila
country, where every town has a distillery and the air smells like sweet
fermenting molasses, a sign proudly marks the entrance to Miguel Ramírez's
farm: "Rancho Ramírez: Producer of Agaves." But behind the fence, the blue
agave plants, the raw ingredient of Mexico's famous tequila, are getting
harder to spot. They are being replaced by row after row of leafy
And this story in
Savour that frozen margarita in your hand, for soon you
might not be able to afford it. Mexico's tequila industry is about to become
the latest victim of America's growing thirst for ethanol.