By: Nagarajan S -- Senior Research Analyst
20 March, 2014
Tequila is gaining interest among consumers across the globe. The global demand for the drink is rising at a significant pace year-on-year. Exports of tequila from Mexico grew at a CAGR of 4.5% in the last five years. On the other hand, agave, the raw material that is used to manufacture tequila is expected to face a severe supply crunch in the near future. Price of agave is expected to rise by more than 100% by 2018 compared to the current levels. Distilleries must equip themselves to mitigate the anticipated risk resulting from the rising cost of raw materials. A mixed effect on the distilleries is expected to be felt across the industry. Small and medium-sized distilleries are expected to be affected to a significant level. Although raw material price rise is expected to have a relatively lower effect on the large distilleries owing to secured agave supply through contract farming, these distilleries could explore opportunities to expand their existing manufacturing capabilities during the anticipated crisis situation. Unable to withstand the rising production cost, a significant number of small and medium sized distilleries are expected to shut-down or sell their facilities during the period 2015-2018. Large distilleries could capitalize on the situation and expand their manufacturing capabilities by leasing, renting or buying these facilities. Background Undoubtedly, tequila market is gaining strong momentum across the globe. Shipments of tequila from Mexico, the only country that produces the drink is rising significantly year-on-year. With global economy expected to be back on track in the near future, demand for tequila is expected to increase further. On the other hand, blue agave, the raw material that is used to produce tequila is taking a different turn in Mexico. Blue agave is a crop that is allowed to be grown only in Mexico for tequila production. A drink is to be called tequila only if it is produced from blue agave grown in the five states in Mexico (Jalisco, Guanajuato, Michoacï¾ n, Nayarit, and Tamaulipas). Agave takes 8?10 years after plantation to be ready for harvest. The industry would not be the same during harvest as it was during the plantation season. The tequila industry is expected to face a severe rise in production cost owing to a supply-crunch of the raw material in the near future. Scenario Overview: Agave Production The current agave production is dependent on the market conditions that prevailed 8-10 years back. Prices of blue agave follow a cycle of crests and troughs at intervals of every 8-10 years. Prices of blue agave soared significantly during late 1990s and early 2000s. Plantations for next harvest sky-rocketed as the famer margins increased significantly. Thus, existing farmers invested significantly during this season and planted more than three times of average plantations. High margins also attracted new entrants into the industry which set a stage for historical peak production levels and an over-supply scenario during the period 2005-2010. This resulted in drop in prices of blue agave by more than 85% in 2010 when compared to previous peak level in 2002. Thus, agave plantation went down drastically and is expected to result in a severe short-supply of tequila raw material in the coming years. (2015-2018). Prices of agave is expected to increase significantly leading to severe rise in cost for the tequila manufacturers.