Recent Tequila News

 

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.

But the Mexican government wants to change that, proposing a regulation that would ban bulk shipments and require all tequila to be bottled in Mexico.

The Mexican government, which will put the rule out for public comment next month, contends that requiring tequila to be bottled in Mexico will guarantee the quality of the product.

"We are concerned that the measures in place now are not working properly," said Salvador Behar, a trade attorney with the Mexican Embassy in Washington. "We want to be sure that whatever is sold as tequila is proper."

 

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.

Production of tequila in 2006 rose 15.68%, to 242 million litres, the council said. The largest importer of tequila was the United States, with 106 million litres, followed by the European Union with 15.9 million litres. Chile, China, Japan and the Bahamas are also prominent importers.

A total of 778,000 tonnes of agave were used as a raw material for Mexico's 2006 tequila production.

 

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!

Agriculture secretary - and former Jalisco governor - Alberto Cardenas Jimenez announced the relief, but commented that the previous high price drove many growers to plant agave and attracted many speculators into the industry. He also commented that agave continued to arrive from outside of the designated growing area - from  San Luis Potosi and Zacatecas - which are not part of the authorized agave-growing or tequila-producing regions - and this was  exacerbating the situation.

The Jalisco government's rural development secretariat forecasted the supply of agave will plunge by the end of the decade after the glut works itself out, suggesting another shortage looms.

According to figures released by the Camara Nacional de la Industria Tequilera (National Chamber of the Tequila Industry) , tequila comprises 45% of all hard liquor sales in Mexico and production grew by 19% over the past year. Tequila consumption outside of Mexico also continued to grow; sales jumped by 22% last year.

 

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 disappear?

"That is not going to happen," says Ramon Gonzalez Figueroa, director general of the Tequila Regulatory Council in Jalisco. If anything, he says, an overabundance of agave has pulled prices down.

 

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.

Also, in the intervening years since those agaves were planted, competition has grown, so companies are having to market more, to get shelf space. That's more money spent.

In another 8-15 years the low agave prices of today will have meaning to the tequilas then... but also by then other prices will have risen, and the companies will have had to plant a lot more agave to compensate for the shortage that happens in 2010-12... which means even more money spent.... so like so many other things in life, tequila prices won't fall, regardless of the fluctuations in agave prices.

 

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.

 

Recent trends

During the shortage, producers faced with a lack of agave tried to compensate by making reposado and aņejo 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.
 
Although the shortage is over, and production of 100% agave tequilas is on the rise, consumers have to be very diligent when purchasing products. Many of the fancy bottles still house mixtos. The consumer has to read the labels closely because it’s easy to pick up a bottle that sells itself as “aņejo” without realizing it might be just a mixto!

 

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.

The debacle has seen agave farmers and tequila producers try to rein in the roller-coaster cycle of planting that is a response to wild swings in price. The Mexican government now requires agave farmers to register their planting, and the tequila industry is monitoring crops with satellite photography.

The Mexican government this year began promoting a Tequila Route, with the wine country of California's Napa Valley as a model, that will draw tourists to visit distilleries, such as the Don Valente operation.

Company executive Marco Antonio Jauregui said one would assume that he would be gleeful at the low agave prices, but he shares the fears that his key suppliers may dry up.

"We aren't pleased that there is this much agave in the ground," he said. "Yes, it helps us in the short term, but the tequila-makers, we could end up losing. The agave farmers and the tequila-makers, we need each other."

 

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.

The Tequila Regulatory Council, an industry group, also has launched an online system in which tequila producers log each agave purchase. Industry watchdogs can then track trends in real time. The council also has purchased satellite photos to compare agave planting from year to year.

Officials report that about 20 percent of this year's crop has a disease, a sign that farmers have turned their backs on their crops. Also, corn production in Jalisco is up an estimated 15 percent this year, a response to another boom -- high corn prices fueled by its use in ethanol. Del Toro worries that some agave farmers might switch to corn permanently.

 

 

Sources:

• Motley Fool
• Inter-American Development Bank
• Otro Tequila blog
• 2006: Record production levels
• News sections at tequilatastings.com
• and tequilaaficionado.com
• and tequila.net and
• new at Los Cabos Guide.
• El Informador: Negotiations between agave growers and producers
• Mexican farmers replace tequila plant with corn
• U.S. tequila industry troubled by Mexican regulation plans
• Tequila sun sets on fields of fortune

Back to top