As agave prices in Mexico experience a significant downturn and demand for premium and above tequila steadies in the United States, industry analysts at IWSR suggest that brand owners have a unique chance to enhance product quality at more accessible price points.
The remarkable decline in agave prices is noteworthy, considering they reached a peak of MXP32/kg just 18 months ago, only to plummet to MXP5/kg by February 2024. This trend is expected to persist as a result of the substantial increase in agave plantations over recent years. Between 2021 and 2022 alone, planting surged by 10 percent, while the number of registered agave growers has quadrupled since 2018.
Jose Luis Hermoso, IWSR’s Research Director for Central and South America, anticipates further reductions in agave prices due to these factors. He notes that the surplus inventory of agave plants, combined with a deceleration in premium tequila demand in the US following years of rapid growth, has triggered a rush among novice agave cultivators to offload their produce in the current market.
“The influx of new plants cultivated in 2021 and 2022 suggests that agave pricing may not stabilize until 2026,” Hermoso predicts.
The cyclical nature of agave pricing, attributed to the extended maturation period of agave plants, has historically led to imbalances in production cycles. When prices surge, growers tend to expand their plantations, as evidenced in recent years. However, once these mature, prices decline, prompting growers to reduce planting, leading to supply shortages and subsequent price increases.
Despite robust double-digit growth in tequila consumption volumes in previous years, the US market witnessed a modest four percent increase in the first half of 2023, according to IWSR data.
Richard Halstead, IWSR’s COO for Consumer Research, suggests that the market may soon witness a surge in competitively priced 100 percent agave tequila offerings, potentially attracting new consumers or prompting existing ones to trade down.
Adam Rogers, Research Director for North America at IWSR, emphasizes that while declining agave prices present opportunities for leading brand owners to enhance margins or intensify promotional activities, they are cautious of diluting their brand equity through widespread discounting. Premium and above products are expected to maintain dominance, as brand owners prioritize margin preservation.
Moreover, multinational tequila brand owners are adopting long-term grower contracts and integrated farm-to-bottle production models to mitigate supply and pricing fluctuations, according to IWSR. This strategic approach aims to stabilize the agave spirits category in the long run.
In summary, while the current market dynamics offer avenues for innovation and growth, industry stakeholders remain vigilant in balancing profitability with brand integrity, ensuring the sustained evolution and prosperity of the tequila market.
