What Will it Take to Drain the Lake of Tequila?

Mexico’s Tequila Surplus Reaches 500 Million Liters

According to a report by the Financial Times, Mexico is sitting on a “lake of tequila” or rather, 500 million liters of the popular spirit. Though tacos and tequila go hand in hand, dwindling demand and potential tariffs could be a blow to the industry and the rural communities that support it. 

Tequila’s Path to Popularity

The tequila industry has worked hard to revamp its image in recent years and appeal to broader, more affluent markets. When COVID restrictions sequestered folks at home in 2020, their work paid off. American consumers began purchasing more tequila as did consumers in Germany and Japan resulting in 2021 exports reaching 300 million liters. Consumer trends drifted towards premium lines and shoppers were willing to pay upwards of $70 for a bottle if it was pure and distilled in a certain region of the country. 

Authentic tequila kicked off and by 2023 the United States was importing $4.6 billion worth of Mexico’s exports.  Tequila has surpassed whiskey sales to become the third most popular spirit in America. Last year, was the first year the industry saw a dip in sales in nearly 20 years. 

Why Does Mexico Have a Surplus of Tequila?

Declining tequila sales are largely attributed to shifting consumer purchasing habits. The United States buys 80% of Mexico’s exports which fell by 4.2% last year. Current information suggests shoppers are opting for more household name tequila brands rather than the more expensive premium bottles. It is also suspected that inflation is playing a part in fewer sales. But, the fact remains, Mexico is sitting on a year’s worth of tequila exports while continuing to produce more.  Supply and demand are quickly getting out of balance as barrels ready to be bottled begin to build up.

Tequila and Tariffs

Talk of surplus tequila comes in conjunction with fear over tariffs. Price increases of any sort typically cause a decline in demand with early estimates predicting a 1% price increase as equivalent to a 1.33% decrease in volume demand. A proposed tariff of 25% will seriously lower demand. The United States is the primary export destination for such a high percentage of Mexico’s tequila that the country worries it will not be able to find additional markets abroad if American demand wanes as tariffs are implemented in the coming year

Mexico’s tequila industry supports approximately 70,000 jobs involving agave cultivation, distillation, bottling and marketing. Authentic tequila can only come from certain geographic regions of Mexican states  including rural communities in Jalisco, Guanajuato, Michoacan, Nayant,  and Tamaulipas. Knowing that tequila was produced in these areas adds value to the premium product lines.  Geographic indicators speak to the cultural significance as well as the authentic identity of the liquor and the laws that protect this production ensure that premium tequila can’t be sourced from other parts of the world. But, with looming tariffs, the small rural communities working the agave fields and distilling the spirit could be in jeopardy. 

While these areas would be considered agricultural regions, agave is the only crop that does well here. The climate is dry making it difficult for other agricultural industries to offset a potential loss in agave farming. These rural communities are very dependent on the cultivation of the agave plant and the production of tequila. As supply continues to increase, the bottled spirit could become less valuable and ultimately impact the families whose lives are intertwined with the industry.

Some American distributors have already begun stockpiling products that would be subject to tariffs after a 90 day delay. Beer and other alcoholic beverages can be brewed in multiple places, whereas tequila can only be sourced from a certain area. Forward thinking distributors who are planning for price increases may see the tequila surplus as an opportunity to purchase at a lower price and buy themselves trust with American consumers who are likely to change purchasing habits if prices continue to climb.

Will the Tequila Industry Stabilize?

Some believe the industry was growing too quickly and that the supply chain is delicate. Agave plants take three years to mature before they can be used in the making of tequila. Large companies have begun planting their own agave plants. While they are still being grown in the “right” regions they are still being cultivated on ground that has never been used to grow agave before calling into question the authenticity of the product being bottled.  

The large scale farming operations have also adopted the use of pesticides which if fully understood would have the potential to decrease the value of premium labels.  Premium brands were built on the idea that tequila is produced from agave plants cultivated in the old way where plants are pruned regularly to combat pets. Consumers might value the pesticide infused tequila differently than pure agave.

If the tequila industry continues to grow at the pace it has been since the 1990s the small farming communities could become a lesser part of the industry anyway. As larger corporations either scoop up the land or continue to build farms in geographically approved regions some fear it will begin to create serious economic and environmental issues that could undercut the tequila industry in the long run. Perhaps the time has come for the industry to settle in to a stable production capacity that accommodates both individual small farms as well as large scale production.

It may take a while to drain the lake of surplus tequila, but the slow down could produce long term benefits for small agave farming families and their communities, as well as, protect the value of premium labels for consumers.