What We Need to Know About the Tequila Surplus

Mexico sends 80% of its tequila to the United States.

But now that might be too much.

The Tequila Surplus

Signed by the U.S., Mexico, and Canada, the USMCA guarantees that tequila is a tariff-free spirit with a specified recipe and region where it has to be made. As a result, tequila drinkers can always look to five Mexican states and the blue Weber agave for the origins of their drink. Similarly, a slew of bilateral agreements and the EU recognize tequila’s protected status.

The Blue Weber agave:

It appears though that tequilla makers might have misjudged their market.

Demand

According to the Financial Times, Mexico has a whopping half a billion liters of unsold tequila (or maybe more). Close to its yearly production, the inventory reflects shrinking U.S. demand. Either ageing in barrels or soon to be bottled, they had produced too much tequila. Whereas George Clooney’s Casamigos had boosted demand, now consumers are cutting back. Up 17% in 2021 and 4% in 2023, this year consumption is down 3 percent. Responding, distillers have lowered prices.

Supply

The good news is that the agave is cheaper. Plunging from 30 pesos a kilo to just 6 or 8 for contract holders, distillers have the capability to produce more for less. However, their planning is complicated by the possibility of a 25% tariff. In addition, because tequila evaporates quickly, its life in barrels has to be limited to three years or less. So they cannot wait for markets to change.

Our Bottom Line: The Power of the Market

Having name protection, tequila occupies a “slot” on the right side of a competitive market continuum:

While tequila’s position on the scale should mean more ability to control prices, instead the market has been displaying its power. With demand decreasing, you can see the results. But, I was not sure if cheaper agave makes supply increase or tariffs decrease it.

So you decide:

My sources and more: Knowing that tequila was a protected spirit, I learned more from this article. and here and here. Meanwhile, the Financial Times explained the tequila surplus.