SURPLUS OF AGAVE CACTUS THREATENS TEQUILA INDUSTRY

SourceMex

     The supply of blue agave (agave azul) cactus in Mexico
has gone from one extreme to another during the past several
years, with the severe shortages reported in 1999 and 2000
expected to turn into a major oversupply during the next two
years.  Production of blue agave cactus, the variety used in
premium tequila, is projected at 46.4 million plants by 2006. 
This is nearly twice as large a crop as the 24.8 million
plants produced in 2000.
     The Consejo Regulador del Tequila (CRT) says both
extremes create problems for the tequila industry.
     In 2000, a shortage of blue agave, along with a surge in
exports, left tequila producers scrambling to meet demand (see
SourceMex, 2000-06-14).  Tequila consumption soared during the
1990s, largely because of increased demand in the US and
Europe (see SourceMex, 1997-02-12).
     As a result of the shortages and increased consumption,
prices for agave soared by 1,600% by 2000 while tequila
production was declining by about one-fourth because of the
lack of supply.  The lucrative price paid by distillers led
growers to increase their plantings significantly in the late
1990s.
     Those new plantings, which have gone through the normal
growth cycle of about seven years, are expected to be ready
for the market by 2006 and 2007.  A large share of those new
agave azul plants will be harvested in areas outside the
regions in the states of Jalisco, Nayarit, Guanajuato,
Michoacan, and Tamaulipas that have been certified by the CRT.
     "The uncontrolled planting has occurred both within and
outside the designated regions," said CRT official Cristobal
Mariscal, who is also the director of legal affairs for
Mexico's giant tequila producer Jose Cuervo.
     
Bootleg tequila becomes a problem
     In most cases, the "uncertified" agave plants are being
used to produce a bootleg version of tequila, which competes
on the domestic market with the original spirit.
     CRT officials say the availability of the bootleg tequila
not only lowers the price for the original product but also
fails to meet the standards of the tequila industry.
     One of the greatest risks is that the bootleg product can
contain a much higher alcohol level than certified tequila,
creating a health risk for the consumer.  This has prompted
government health inspectors and tax agents to seize about
40,000 gallons of bootleg tequila and close down 135 liquor
stores that were selling the illegal product.
     Mariscal said an oversupply of agave is already evident
in 2004, with estimated production of 578,000 MT expected to
greatly surpass demand of only 512,000 MT.  The problem will
worsen by 2006, when estimated production of 1.21 million MT
will overwhelm the projected demand of 593,000 MT.
     "If the current price is already at a very low level of
3 pesos (US$0.26) per kilogram, the projected surplus could
cause the market to collapse," said Mariscal.  In contrast,
bottlers were paying as much as 18 pesos ($1.56) per kg
between 1999 and 2001.
     CRT officials said small-scale producers would be hurt
most by a weak market because they have invested almost all
their capital into production.  The Confederacion Nacional
Campesina (CNC) estimates that more than 200,000 Mexicans are
employed by the tequila industry, including those who dedicate
their lives to growing agave.
     Several large tequila manufacturers like Cuervo, Sauza,
and Herradura have pledged to help growers with four hectares
or less by acquiring a total of 20,000 MT from them.
     
Tequila industry to expand product line
     The tequila industry is also considering a proposal to
diversify its products in overseas markets to meet the growing
competition from vodka and other spirits.  Roughly 60% of the
tequila produced in Mexico is exported to 150 countries,
resulting in profits of close to US$490 million per year.
     One proposal to increase sales in the US and Europe would
be to allow overseas bottlers to add flavoring to the
nonpremium tequila products.  The products contain 51% pure
blue agave and 49% cane liquor or other varieties of maguey
cactus.
     The Mexican regulations governing the quality of tequila
would not allow the addition of flavors in Mexico.  Many US
distributors, however, are able to import tequila in bulk
shipments and could conceivably combine the spirit with other
products during the bottling process.  Earlier this year, the
Mexican government removed uncertainty regarding the bulk
imports by withdrawing a proposed restriction that would have
limited tequila exports to products bottled in Mexico (see
SourceMex, 2004-04-28).
     The decision to allow bulk shipments could boost Mexican
tequila exports above last year's level of about 100,000
liters, the Secretaria de Economia (SE) estimates.
     The proposal to allow flavoring to tequila products
marketed in the US would represent a significant change for
the industry, which has long resisted allowing the dilution of
even its lower-quality products.  The industry had
unsuccessfully fought the marketing of products in the US such
as a tequila-beer mixture sold under the name of Tequiza and
a tequila-grapefruit mix sold in a can (see SourceMex,
1999-09-22).
     Some of the larger Mexican tequila companies are looking
into the possibility of entering the flavored-tequila market,
perhaps through a US subsidiary.  "We see this as a business
opportunity," said Cuervo's Mariscal.  He declined, however,
to confirm whether Cuervo is working on a flavor line.
     US distributors predict that flavored tequilas would
become a poplar product in the US market.  "The only ones who
don't like it are the Mexicans," said Dave McQueen, whose
Nevada-based Tukys company plans to start selling five flavors
of tequila--watermelon, lime, coffee, strawberry, and
orange--in the US in November.
     Some industry sources note, however, that Mexican
consumption patterns have changed some since 1995 because of
economic considerations.  One trend has been the increase in
consumption of nonpremium tequila, said Eduardo Miquel, vice
president of Tequila Cazadores.
     Miquel said consumption of nonpremium tequila is expected
to grow by 6% or 7% this year, while that of pure tequila is
expected to hold steady.
     Some Mexicans have abandoned tequila altogether for other
beverages such as beer.  A study conducted by the Comision
para la Industria de Vinos y Licores (CIVYL) indicated that
the trend could be attributed in part to the increasing price
of tequila, particularly between 1994 and 2002.  Tequila
prices during the period increased by 574%, while those for
beer rose by only 269%.  Beer currently accounts for more than
71% of Mexico's market for alcoholic beverages, followed by
brandy with 9.4% and tequila with 8.4%, said the CIVYL.
     
Cuervo mixes tequila with tourism
     Still, tequila remains an important element of Mexican
culture in more ways than one.  Some industry officials are
attempting to tie the tequila tradition to the tourism
industry, with the Cuervo company developing a visitor center
in the town of Tequila, Jalisco state, to celebrate the
history of the spirit.  The center is about 30% complete and
will feature a museum with interactive displays, restaurants,
a crafts market, and souvenir shops.
     The company also plans to create smaller versions of this
center in popular Mexican tourist destinations such as Puerto
Vallarta, Cancun, and Tijuana, as well as in selected cities
in the US, Europe, and South America.
     "Just as we are able to export tequila as a drink, we
would like to also export the Mexican experience to the rest
of the world," said Juan Beckmann, Cuervo's president of the
administrative council.  [Note: Peso-dollar conversions in
this article are based on the Interbank rate in effect on Oct.
20, reported at 11.47 pesos per US$1.00] (Sources: La Jornada,
04/05/04; La Cronica de Hoy, 03/01/04, 05/28/04; Milenio
Diario, 01/13/04, 07/13/04; Notimex, 05/31/04, 10/09/04; El
Universal, 09/16/04, 10/18/04; El Financiero, 10/18/04; The
Herald-Mexico City, 08/30/04, 10/07/04, 10/14/04, 10/19/04)