Agave Crisis: Boom, Bust or Business As Usual?

The truth behind “the coming tequila shortage”, and the real risks the industry faces

Here’s the good news on the “agave crisis”: We are reaching the peak. The bad news is we will likely experience a similar, or worse, situation in about 12 years. That’s because this cycle of boom and bust in agave availability and pricing has been happening since tequila was popularized.

Agave growers tend to plant more agave when prices are high, imagining the profits they will make when the plant matures in seven to eight years. But when that time comes, prices crash because there is much more agave available. So, the growers get disillusioned, they sell their crop for little or nothing, and decide to plant something else in their fields, like corn. Seven to eight years after that there is an agave shortage and prices skyrocket, and so the cycle continues.

“The story of boom and bust agave prices goes all the way back to the time of my great-great grandfather, 140 years ago,” says Guillermo Erickson Sauza, owner of Tequila Fortaleza.

“Around twenty years ago we had a similar peak at close to $1,600 USD per ton of agave, and four years ago it was below $25 USD per ton,” he said.

The difference this time around is that the effects of this cycle have been extended by increased demand, due to the global popularity of tequila, and some speculation on the part of the agave brokers and growers, who want to get the best prices they can for their crop while the price is high. (This is not unusual, of course, since you could say the same of many businesses.)

But, this time around these factors have agitated the normal tug between supply and demand, resulting in some of the highest agave prices seen since 2002 to 2003. Agave prices have already hit 22 pesos per kilo, when it was just 3 pesos/kilo just 5 years ago.

This situation has made for great headlines about an “agave shortage”, and even some talk that we risk “running out of tequila”, which has confused consumers. Some tequila lovers were left wondering if they should temporarily switch to another spirit, or risk doing the industry even further harm by creating demand when there is little supply. But these headlines have been misleading. There has been enough supply—albeit at high prices—but many tequileros are refusing to pay for it, and some even claim to have shut down production until prices drop.

“There is NO shortage, there is speculation,” says master distiller Felipe Camarena, maker of the G4, Terralta, and Pasote tequila brands, who also comes from a long line of agave growers. “I can get everything I want as long as I pay the price. People come to our distillery every day offering to sell agave.”

He, and other brand owners we’ve spoken with, feel that these suppliers have exaggerated the going rate of agave, and that some have decided to wait to sell until agave hits a certain high (like $25 MXN pesos/kilo), even if that means letting some of their plants rot in the field while they wait for their magic number.

However, agave farmers, such as Enrique Fonseca, believe that the price is, and always has been, based on the available supply and demand for agave at any given time.

“It’s the free market,” Fonseca says. “[Tequila makers] should stop buying at the high prices. If they can then get the prices to go down, then it would be true that there is no shortage, just speculation. But, I haven’t seen that lately. And I don’t think I will see that in this year, at least.”

Although tequila producers are predicting (hoping) that we’ve already hit the top, and agave prices cannot go any higher simply because it makes tequila production too expensive, Fonseca disagrees. Based on the 2001-2002 agave shortage, he believes that prices could go as high as $30-$33 pesos per kilo before coming back down.

The boom and bust cycle is a source of frustration for both agave growers and tequila producers, and with each high and low, tension becomes visible on one side or the other. Currently, it’s the brand owners who are feeling the most pressure as they struggle to stay alive while waiting for agave prices to drop. In a few years, it will be the growers.

Of course, some larger players in the industry either maintain their own crops, and/or have long-term contracts with their agave growers that set the price they pay, insulating them somewhat from the cycle. This is not the case for most smaller producers, who can’t commit to buying fields of agave at a time. The only way they can keep prices down is to own and harvest their own fields.

Dr. Adolfo Murillo has been growing agave on his family ranch for 25 years, and has experienced this cycle from the perspective of a farmer and a brand owner. He estimates that the break-even point for an agave farmer is between $2-$3 pesos per kilo. However, his tequila brand, Alquimia, uses only his own organic agave, which costs more to produce, but it’s still not as expensive as the current free market price.

“I have seen, too many times, a family invest their meager resources into buying plants, devoting their land to a promise of a good price, dedicating years of hard work, and many times going into debt to buy fertilizers, pesticides, weed-killers, and fungicides to keep their crop alive,” says Murillo. “Then, when it is time to sell, they find that the price is so low that they will not recover the money they invested.”

“While there may be a few companies that are completely self-sufficient, I think most are not,” says Erickson Sauza. “It takes a lot of land or partnership contracts to grow the agave necessary for our tequila industry. And, there is no quick solution to the problem.”

“Currently, we see three and four-year immature agave being harvested. This is because the growers are betting that the price will drop before their crop reaches maturity,” he added.

Some larger producers have been able to set their own rules, due to the value of their contracts. Although these contracts are often unfavorable during the high and low points of the boom and bust cycle, some are meant to bring some stability to the cycle.

Patrón, for instance, sets a minimum price to ensure the growers’ profitability even when prices are low, and then guarantees the current market rate when prices rise. This is all part of an effort to keep the growers in a more consistent business, rather than hedge on agave prices, a Patrón spokesperson confirmed.

Or course, there is another, newer industry player that is affecting this cycle—tequila makers who use diffusers. Diffuser production uses a giant machine commonly used to create agave nectar. It is a continuous process that can speed up the crushing, extraction, and conversion of starches into sugars in the most efficient way possible. Traditional processes require approximately 7 kilos of agave to create 1 liter of tequila, while diffusers only need 3.3 kilos to produce the same amount. They also don’t require the mature plants that traditional producers need. They can use four-year old agaves in a diffuser and achieve an even greater yield of fermentable sugars than a traditional producer can get from six to eight-year old agaves.

And while there has been a severe shortage of mature plants over the last year or so, younger agaves have been a bit easier to come by, giving diffuser users a slight advantage.

“[Diffuser producers use] baby agave plants which don’t require traditional planting, field maintenance and harvesting techniques, nor the communities sustained by those jobs,” says Jake Lustig, of Haas Brothers Spirits, and owner of the ArteNOM brand of tequilas.

Over the past two decades, this practice has been the main contributor to the reduction in the number of agave cultivators from over 25,000 in the 1990’s to fewer than 2,500 in the 2010’s, all while the category has tripled its production output, according to Lustig.

“The negative impact of chemical diffuser technology on rural economic sustainability, farmworker culture and heritage, and to the distillate itself simply cannot be overblown,” Lustig adds.

That’s a look at the current landscape. Let’s look to the future.

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Where did we get the numbers used in the chart?

During the process of writing this story, and searching for historical numbers online, we realized that they didn’t exist anywhere. So we made contact with our industry friends (tequila brands, distillers, and agave growers who have been buying/selling agave through all of those years.)

In total, we received data from 4 brands, 3 distilleries, and 1 agave grower – all of whom kept records throughout the years. They agreed to share this data with us under the condition that we not release their identity. The information was fairly consistent among them all, so we averaged them all together to get the chart you now see here.

Once this chart was generated, we sent it to all of the parties who sent us data to confirm/fact check it, and they all agreed it was accurate.

If you wish to use this graphic, or the data we’ve collected, no problem. But please link to our story and be sure to credit TasteTequila.com as the source.

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Agave Ahead!

Official statistics from the Consejo Regulador del Tequila (CRT) and the Camara Nacional de la Industria Tequilera (CNIT), indicate that the agave supply will increase dramatically over the next 5 to 6 years. By 2023 we should see an overabundance of agave, where the value of agave could be in the range of $1 MXN peso/kilo. Current projections indicate that by the year 2023 there will be 5 times the amount of agave available than the industry needs.

(These calculations were done including the agave needed to sustain the agave nectar industry.)

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The Growers’ Side

It’s easy to understand why the smaller growers in particular would like to make as much as possible, while they can. Mexican tax rules require that single-estate growers pay a large tax bill on gross proceeds when their crop is sold, as if it were 100% profit, instead of being able to deduct expenses over the seven to eight years it takes for their crop to mature.

However, ongoing corporate entities and multiple-parcel owners don’t have this problem since they are making income from crops in different fields each year and are able to deduct expenses annually.

But now, in the boom cycle, growers have a different challenge—dividing up their proceeds into different corporate entities in order to take advantage of another Mexican tax rule that says if you are just a grower you are exempt of taxes from the first million pesos. This has lead to growers creating entities called “Sociedades de producción rural”, or “Sociedades”, that include multiple family members, allowing them to make millions of pesos, tax-free.

The Sociedad has the same benefit as a single grower, so if there are two members, for example, both are free of taxes for about 1 million pesos each. But the members can do that only if 90% of their income is coming from agriculture.

Some agave farmers are pulling in so much money right now that they are running out of family members who can claim ownership of their crops. Mexican tax law says that after the first $1 million pesos, a farmer must pay a 20% tax on the remaining income. Since they cannot deduct expenses incurred during the six to seven years it took to raise their crop, this is where they must pay themselves back. This is no easy task when the government takes their cut off the top.

And, given that the boom time will no doubt be followed by a bust, we can see why it’s important for growers to use any and all tax benefits they can find to save as much as they can. And, even that is often not enough. The historical pricing data shows that the bust cycle is now a lot longer than the boom periods, and for this reason many small family farms have found it impossible to survive.

The reason why the bust periods now drag on for so much longer than they used to is linked, in large part, to the use of modern diffuser-based production processes, where the necessity for quality mature agave is diminished.

“I believe the shortage will be extended due to the fact that a lot of agave buyers are purchasing very young agaves, some as low as 3-years old,” says Murillo.

The use of younger agaves by diffuser producers has a direct effect on brands using traditional processes, according to Lustig.

“There is so little mature agave remaining that the finer quality distillers [have to] drive up prices because of the limited supply,” says Lustig.

“The wide availability of cheap, diffuser juice has extended the time it would otherwise have taken to get to the final stage in this cycle,” he says.

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Sustainability

While we are looking at a boom in agave availability over the next five to six years, some rightfully point out that this doesn’t address sustainability. There are a few issues affecting the long-term health of the industry, starting with the agave plant itself.

Almost all agave is produced using clones of the mother plant that are genetically identical. The problem with this is that if the plant is not allowed to evolve and mutate, it could become susceptible to a disease or pest that has the potential to wipe out a huge swath of the supply. That’s why some are calling for agave growers to allow the plant to pollinate naturally.

“For more than twenty years I’ve been trying to bring attention to this problem,” says David G. Suro, owner of the Siembra Azul and Siembra Valles tequila brands. “I don’t know anyone who plants from seed. If there is someone, I would like to meet them, and congratulate them!”

Making matters even more urgent are the effects of climate change, which has accelerated beyond anything this amazing 12-million year old plant has seen before.

“All living beings are suffering because of climate change,” says Dr. Benjamín Rodríguez-Garay, a researcher of plant biotechnology at CIATEJ Unidad Zapopan, specializing in the genetic improvement of the agave species.

He says that, with a stable environment, it would normally take about 800 years for a disease to evolve so that it can get beyond the agave’s immune system. But with colder winters and hotter summers, microorganisms and bacteria will find it easier to attack the stressed-out agave plants brought about by climate extremes, and dramatically shorten that period of time.

“Many people are suggesting that plants from seed produced by open pollination are the solution because the genetic variation is recovered. However, in the real life this will not work for the tequila industry,” says Rodríguez-Garay. “Instead, I propose to induce genetic variation by controlled pollination, and then select the good genotypes/phenotypes which have good performance under the new stressful environmental conditions.”

What Rodríguez-Garay is suggesting is the kind of genetic breeding that is done with other kinds of crops: identifying the plants that are doing well with today’s climate, then harvesting seeds for planting a portion of the crop to restore some form of natural protection.

“At CIATEJ we have developed protocols to do all of the above and we are working on these issues, as well as… many other Mexican institutions,” he adds.

But in the meantime it is still quicker and easier to continue with the common industry practice of using the genetic clones produced by the agave plants, despite the fact that it comes with risks.

“The practices that producers are currently using are not in the best interest of the industry, long-term,” Suro says.

We have heard rumblings from a few producers who say they plan to start experimenting with sourcing agave planted from seed, but no one has started quite yet.

Still, the fact that producers are taking sustainability more seriously is good news, but there is another essential ingredient to tequila production that is potentially at risk: the jimadores. These are the field laborers who do the back-breaking job of harvesting agave plants, often in intense desert-like conditions. Unlike just about every other part of the production process, harvesting agave cannot be done by machine. If the jimador population does not grow with demand, it will come with negative consequences for the tequila industry.

The job of jimador has traditionally been passed down from generation to generation, but because they do the same work in the boom period for the roughly the same pay as in the bust period, there is no financial incentive for future generations to continue in the family business.

“We are not generating any incentives for new generations of jimadores,” says Suro. “We have to, as an industry, create economic incentives for them to stay in the industry. We are doing a very poor job of creating those incentives.”

So, while this current “agave crisis” is really just part of a normal cycle, it could become a catastrophe in the future if we don’t pay attention to the health and sustainability of agaves, and properly incentivize the people who care for and cultivate them. But for now, enjoy your tequila. Many years, hard work, and passion for the spirit have gone into it.

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How You Can Help

As a consumer, you can help simply by being aware of the current landscape, and rewarding the brands who are doing something to improve the situation.

Here are some ways you can be part of the solution:

Check the production processes of a brand before you buy. The Tequila Matchmaker app and website can tell you how a tequila was made. We all know that each production process has an influence on aromas and flavors in the final product, but they also have an influence on the industry as a whole.

Stop buying cheap tequila. With agave at $22 pesos/kilo, if a 1 liter bottle of 100% agave tequila is below $27, be suspicious. Unless the producer owns their own agave fields, and can produce tequila at a lower cost, odds are someone is getting cheated. It could be the farmer, the brand owner, or it could even be you.

There’s $9 USD worth of agave in the bottle alone. Add in the cost of the bottles, caps, labels, boxes, and it costs about $12.16 just to cover expenses at the distillery. Add another $15 for transportation, importation fees, distribution fees, and retail markup and you’re looking at $27/bottle for the brand owner to break even if they buy their agave on the free market.

Of course, brands that use diffusors can make tequila at a much lower cost whether they have their own fields or not, since it is an efficient process that can use fewer, and younger agaves. It’s up to you to decide if having cheap tequila is worth supporting the trend toward diffusors—for us, it’s not.

Spread the word. You get what you pay for. Teach other people about this issue, and encourage them to support brands that are doing something to help solve the sustainability issues outlined in this story. If you are a bartender, you’re on the front lines as an educator. Start by getting the mega cheap brands out of your well, and off of your bar.