Blue agave pits, referred to as pineapples, sit in a pile in Jalisco state, Mexico. (Photographer: Mauricio Palos/Bloomberg)

How the Tequila Boom Could Go Bust

(Bloomberg) -- The world just can’t seem to get enough tequila.

It takes about seven years to grow a blue agave plant, the spirit’s prized ingredient. Once mature, tequila makers have to extract the “pina,” or heart, so it can be heated, crushed, fermented, distilled and finally bottled and sold by your local mixologist as part of a trendy cocktail. 

But over the last two years, volatile agave prices have soared, thanks in part to high tequila demand. According to an industry survey by Taste Tequila, the plant can cost as much as 25 pesos ($1.31) per kilogram, up from 2 pesos (10 cents) in 2012.  

In Jalisco, Mexico, ground zero for growing agave, farmers are struggling to keep up. As these producers pull up premature plants in an effort to cash in while prices are high, quality is beginning to fall. At the same time, the skyrocketing value of the agave has given rise to security concerns as the plants become valuable theft targets. This can add expenses for farmers already gambling with an unpredictably priced crop. 

How the Tequila Boom Could Go Bust

Tequila first made its way out of Mexican artisan distilleries to the urban bar scene in the early 1990s. From 1995 to 2005, tequila production doubled as multinational brands jumped in, generating huge profits while making Patron, Jose Cuervo and Don Julio household names.

Though the spirit’s popularity has grown worldwide, people in the U.S. remain tequila’s top consumers, importing more than 171 million liters in 2017. Spain, the second largest market, brought in about 5 million that year, according to data from the Regulatory Council of Tequila. But keeping up with global demand is getting harder: Agave’s seven-year growth cycle requires a long-term investment for anyone looking to distill. And while some brands source from their own estates, others buy from farmers or do both—leaving much of the industry at the mercy of market prices that swing wildly. Without a locked-in supplier or advance contracts, a brand can easily find itself in trouble if the cost of agave shoots up.

Agave prices have priced out brands where there’s no estate or distiller,” said Nicolas Palazzi, the owner of craft spirit importer PM Spirits, which has seen 220 percent growth in revenue in the past year, with tequila as a key player.

Patron Spirits International sources exclusively from “agave families,” setting up advance contracts based on predicted needs, said Francisco Soltero, director of strategic planning and public affairs. Tequila Cazadores, owned by Bacardi Ltd., operates on a similar model. It makes its own 100 percent blue agave tequila with plants obtained from the same farmers it’s used for decades, said Tania Oseguera, the brand’s Master Tequilier. Agave passing through the distillery right now, Oseguera said, was contracted for seven years ago. The price for the plants fell somewhere between the lows of 2011 and today’s high. 

“We get a deal,” she said.

How the Tequila Boom Could Go Bust

Tequila brands without a guaranteed agave supply, however, are the most likely to get squeezed out. “Smaller brands are suffering. It’s cleaning out the market,” Palazzi said. As a result, newer brands are trying to navigate the high prices strategically. Playa Real Tequila has already produced award-winning tequila in its first year in business. It works with a distillery that grows about 80 percent of its own agave and buys the rest from outside growers. The company, said President Arturo Vargas, is selling more than it anticipated, so now it’s closely watching the those market prices.

“For us, it’s better to wait for agave prices to go down again,” said Vargas.

Meanwhile, tequila experts complain that the reputation of this unmistakable Mexican spirit is suffering. “As demand increases and tequila becomes a global product, it’s only going to put more pressure on people to use these giant machines to extract as much sugar as possible,” said Josh Prewitt, general manager at La Condesa, a Mexican restaurant in Austin, Texas. He’s referring to the huge “diffusers” loathed by small distilleries but used regularly by bigger companies. “In the industry we call it aga-vodka.”

Just as distillers worry about agave prices spiking, the farmers who produce it are worrying about an unpredictable downturn.

Despite the liquor’s ascendance, the people most responsible for tequila are struggling to survive. Because of agave’s long growth cycle and volatile pricing, many small farmers can’t afford to stay in business when prices swoon. In 2011, there were 3,075 agave producers, according to data from the Committee on Regulation for Tequila. In 2017, there were only 1,946. Simultaneously, tequila production rose, from 261 million liters in 2011 to 271 million liters in 2017.

“Agave producers are a species in extinction,” said Raul Garcia Quirarte, president of the National Committee for the Tequila Agave Product System in an interview during the Food and Beverage Expo in Mexico City in August.

While some agave farmers hold partnerships with tequila companies and are profiting handsomely in the current market, independent growers are forced to gamble, incurring steep expenses without knowing whether prices will be too low when their agave matures, Garcia Quirarte said. Many growers have decided to leave the sector altogether, rather than risk financial ruin, he said.

More direct contracts with distillers would solve these problems, he said, giving small producers peace of mind. He’s hoping the government of Mexico President-elect Andres Manuel Lopez Obrador, a left-leaning politician who swept to power in a landslide, will help facilitate such a transition. Lopez Obrador campaigned on a platform promising security through economic development, especially by revitalizing the rural regions of Mexico. 

“We hope the new government helps the production chain—and particularly, the social base of the agave industry,” Garia Quirarte said. 

©2018 Bloomberg L.P.