Mexico left with 500 million liters of tequila lake after demand slows

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Mexico has greater than half a billion liters of tequila in inventory, nearly as a lot as its annual manufacturing, because the fast-growing sector faces slowing demand and the prospect of tariffs on exports to the US underneath Donald Trump.

On the finish of 2023, the trade had 525 million liters of tequila in inventory, both growing older in barrels or ready to be bottled, in response to information shared with the Monetary Occasions by the Tequila Regulatory Council. tequila. Of the 599 million liters of tequila produced final 12 months, round a sixth remained in inventory, figures present.

“Much more new spirits are being distilled than are being bought, and inventories are beginning to construct up,” mentioned Trevor Stirling, an analyst at Bernstein, attributing the rise to falling demand and new distillery capability which just lately began working in Mexico. “The tequila trade is poised for a really turbulent 2025. »

Shopper thirst for Mexico’s nationwide drink has grown quickly over the previous decade because the spirit has gone mainstream in the US, thanks partly to celebrity-backed manufacturers reminiscent of George Clooney’s Casamigos.

However demand has receded over the previous 18 months because the pandemic spirits growth subsided and customers declined. reduce on their alcohol consumption in response to rising costs.

The quantity of spirits bought in the US through the first seven months of the 12 months decreased 3 % in comparison with the identical interval final 12 months, in response to beverage information supplier IWSR. Tequila consumption fell 1.1 %, in comparison with a rise of 4 % in 2023 and 17 % in 2021, the height of tequila’s rise.

Though a number of the stock is growing older, somewhat than merely ready to be bottled, tequila evaporates shortly in comparison with different growing older spirits – partly on account of Mexico’s sizzling local weather – which signifies that most tequila just isn’t left in barrels past three years.

So as to add to the trade’s woes, Trump threatened Mexico, the US’ largest buying and selling companion, with 25% tariffs on its merchandise. That might be devastating for the trade and for the Mexican financial system, which is determined by its northern neighbor to purchase 83 % of its exports.

“It might be capturing ourselves within the foot as a result of customers must pay way more,” mentioned Ramón González, president of the Tequila Regulatory Council.

Two-thirds of all tequila produced in Mexico was exported in 2023, and 80% of that quantity was shipped to the US, in response to the group, which ensures that merchandise meet specs and protects the designation. origin of the spirit.

The most important tequila export markets after the US final 12 months have been Spain and Germany, which every accounted for simply 2 %.

González mentioned there have been many considerations about potential tariffs, however downplayed their chance, pointing to elevated funding in tequila by U.S. firms and former threats from Trump that didn’t materialize throughout his final mandate.

“When he was president. . . he mentioned precisely the identical factor, that there could be tariffs et cetera,” he mentioned. “Not solely did he not impose taxes on alcoholic drinks, he lowered them,” he mentioned, referring to the Tax Cuts and Jobs Act of 2017, which reduces tax charges on alcohol produced or imported into the US.

Two of the largest tequila manufacturers, Patrón, owned by Bacardi, and Casamigos, now owned by London-listed Diageo, have been slicing costs for greater than a 12 months in response to falling shopper demand, in response to a Bernstein’s research.

On the similar time, tequila producers have benefited from falling costs for uncooked supplies, together with agave, the plant from which tequila is made.

“There’s at the moment an oversupply, a number of occasions what the trade wants, and it’s probably that a few of these plantations won’t be bought given the trade figures,” González mentioned.

The worth of agave has fallen from round 30 pesos per kilo to between six and eight pesos for contract suppliers, or as little as two pesos within the spot market, in response to growers and farmers.

“It might be a significant blow to the economics of the class if the monetary advantages of decrease agave costs have been competed by a premium value battle,” Stirling mentioned.