The journey of tequila boom from a casual party shot to a posh tipple, its rising popularity driving agave prices up, but signs of a potential bust emerging. Discover the impact on tequila producers and the changing economics of this beloved spirit.
Source: Finatial Times. Republished from “Financial Times” originally published on August 6th 2023.
Wine connoisseurs are not the only ones who earnestly discuss the impact of “terroir”. The relative merits of tequila distilled from highland and lowland agaves now passes for dinner-party conversation between the spirit’s devotees.
Tequila’s rising popularity has driven the price of the spiky plants up tenfold over the past decade. But there are signs that the agave boom may be turning to a bust.
It is not difficult to see why the price of agaves jumped from 2.7 pesos/kg in 2012 to over 30 in 2022. Tequila has undergone a reinvention, from party shot to posh tipple.
As a result, US tequila sales rose by 20 per cent annually between 2018 and 2021, according to Bernstein analysis, outpacing the wider drinks market. High-end, 100 per cent agave tequila is outperforming the lower rated 51 per cent mixes.
Agave production, concentrated in the Mexican state of Jalisco, is singularly inflexible. Plants take seven years to mature. Harvesting the fat central stem kills them off. That means supply is lumpy and takes a long time to respond to price signals.
An agave downcycle may already be under way. The start of the tequila boom dates back to the mid 2010s. Demand is now moderating. Volume growth, which peaked above 20 per cent in 2021, has fallen to mid to high single teens.
This combination of factors has already halved agave spot prices to 16 pesos per kg. In a glut, further falls would be inevitable.
That changes the economics of tequila. It takes 7kg of agaves to make a litre of spirit. By this reckoning, the reported price decline would add $6 to the margin for each litre.
Good news for tequila producers. The biggest, Jose Cuervo, controlled by Mexico-listed Becle, accounts for some 30 per cent of volumes. Diageo is also exposed to the trend. Its premium Don Julio and Casamigo tequilas have been growing rapidly, and now account for 9 per cent of total sales. A sustained fall in agave prices warrants a tequila toast for distillers.
You may be interested in reading: Tequila’s growth out-pacing Vodka in the US On Premise.
