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Tequila is Causing Headaches - Glut in 2008

These days there is so much agave azul that farmers are selling it well
below cost — if they're lucky enough to find a buyer at all.

Now Tequila is causing headaches

Web Posted: 12/26/2007 11:54 AM CST

Sean Mattson - Special to the Express-News

TEQUILA, Mexico — Around the time the millennium turned, armed guards protected agave plantations from robbers. Such was the high price of the primary ingredient of Mexico's national firewater.

These days there's so much agave azul that farmers are selling it well below cost — if they're lucky enough to find a buyer at all.

"I waited seven years for this," said Victoriano Pérez, 67, referring to the time it takes for agave to mature.
"I'd rather let it rot" than sell it for a quarter of his cost, he said. And rot it will.

Some 1.5 million metric tons of ripe agave came onto the market in 2007 and the tequila industry will use only half of it. A similar surplus is expected in 2008.

Tequila makers aren't complaining, of course, but the thousands of farmers who grow agave are seeing red.

Millions of dollars in federal money to bail out farmers hasn't been distributed. Some farmers reportedly burned their agave in desperation and planted corn instead.

Farmer protests could be a fixture of tequila-country visitor tours through 2009.

Industry observers saw the glut coming as long as a decade ago.

In the late 1990s, tequila's popularity skyrocketed outside Mexico and annual production more than doubled in a three-year span.

It aggravated a decades-old boom-bust cycle in agave production, pushing prices to 18 pesos ($1.80) per kilogram.

"A lot of people became (peso) millionaires from one day to the next," Román Escareño said as he oversaw the harvest of some 60 tons of agave verging on overripe for Casa Herradura in late November.

One of them was a farmer named Asunción who was so poor he "tied on his sandals with strips of leather," recalled Escareño, adding that locals hardly have heard from the man since he cashed in.

At its peak, ripe agave on the typical 10-acre plot of land owned by a communal farmer was worth half a million dollars.
"It was like winning the lottery," Escareño said.

Smelling easy money, speculators who'd never farmed a day in their lives went on an agave-planting binge. Responsible for the glut, they're now jostling for government aid.

A single businessman in nearby Guadalajara planted 1 million agaves, said Ramón González, the director of the Tequila Regulatory Council, or CRT in its Spanish acronym, an industry-funded nonprofit organization.

He said speculators claiming to be "authentic" agave growers in search of government aid regularly visit the CRT. One of them drove up in a Cadillac, he said.

"They were people who had no idea what they were doing," González said, adding that the CRT doesn't manage the bailout fund and turned the supplicants away. "Who invited you to the party?"

The government-industry plan is to buy agave from producers at 18 cents per kilogram — which is more than quadruple the 4-cents-per-kilo price of the open market. Government and industry both pay a 9 cents each, an amount considered enough for farmers to break even or turn a small profit.

But tequila makers don't need the agave and have agreed to buy only 50,000 tons of the roughly 700,000-ton surplus at above-market prices, said Sergio Partida, whose family runs a small but award-winning tequila factory called Tres Mujeres.

"It's a problem that doesn't have a solution," González said, adding that the government should concentrate on bailing out traditional farmers.

Industry suffered during the shortage, but "now the farmer is paying," he said.

Tequila is a multimillion-dollar industry and can legally be made only in five Mexican states. Annual production topped a record 240 million liters in 2006 and the drink has been shedding its lowbrow reputation to claim a still-growing portion of the premium and super premium worldwide spirits market.

But the families who supply the industry are struggling.

"The tequila makers don't want to pay well," said María Reynosa, 51, who works at a tequila and souvenir shop on the side of the highway that runs through Tequila, the liquor's namesake town in the state of Jalisco.

Her husband is a jimador, a person who harvests agave, and is earning less, now that agave is almost worthless.
"The price affects everyone," she said. "There's no money."

Tequila makers are having a heyday. They've cranked up production and have some 189 million liters in reserve — almost one year's sales.

The century-old Tequila Centinela distillery, the makers of the Cabrito brand, has increased its number of 200-liter barrels of tequila from 32,000 to 50,000 in recent years, company representative José Luis Sánchez said.

But U.S. consumers shouldn't expect to see steep discounts on their favorite tequilas. David Ozgo, the chief economist for the Distilled Spirits Council of the United States, said tequila makers' lower production costs will be offset by higher transportation costs.

Growth in U.S. sales of premium tequilas remains strong, he said, noting an increase in value brand sales, a possible result of the glut. But strong value brand spirits sales "is what we see ever time there is economic trouble," Ozgo said.

South of the border, Mexican supermarkets are stocked with holiday-volume tequila displays. Quality value brands run about $12 per 26-oz bottle, while premium tequilas still command about $30 and up, more than two thirds of which is tax, according to the CRT.

The CRT often is criticized for doing too little to control the wild agave market but has made significant advances in recent years.

All 130-some-odd tequila factories are visited daily by CRT inspectors. Agave not registered by the CRT can't be legally used and batches of the spirit are controlled by lot number. Authorities thus can trace a bottle's contents to the field where its agave was harvested — making it difficult for unsanctioned agave grown outside the region to enter the market.
"Ten years ago, that (control) would have been impossible," González said.

The next step is to tie growers to producers through contracts that guarantee a steady supply at a fair market price.
But the challenge will be keeping supply steady. Farmers allege that existing grower-distiller contracts are not being respected. With the bottom falling out of agave prices, farmers are not planting enough for 2014. The crop due to mature in three years, the predictable end of the glut, is uncared for.

So another agave price spike is expected, although it probably will not be as drastic as the last one due to the industry's reserve stocks of tequila and its new interest in programming farmers' planting.

"The sector that is the most affected is always the (agricultural) producer," said Santiago López, a lawyer who represents agave farmers and says the government should intervene to keep speculators out and support traditional growers.

"If it is not put in order, there will always be problems," he said.



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