Mexico left with 500 million-litre tequila lake after demand slows

Tequila cowboys: Oaxaca is the spiritual home of agave and mescal. Photo / David García Sandoval, Unsplash

Mexico is sitting on more than half a billion litres of tequila in inventory, almost as much as its annual production, as the fast-growing industry reckons with slowing demand and the prospect of tariffs on exports to the US under Donald Trump.

By the end of 2023, the industry had 525 million litres of tequila in inventory, either ageing in barrels or waiting to be bottled, according to data shared with the Financial Times by the Tequila Regulatory Council. Of the 599 million litres of tequila produced last year, about one-sixth remained in inventory, according to the figures.

“Much more new spirit is being distilled than is being sold, and inventories are starting to accumulate,” said Bernstein analyst Trevor Stirling, attributing the build-up to falling demand and new distillery capacity that has recently begun operating in Mexico.

“The tequila industry is set for a very turbulent 2025.”

Consumers’ thirst for Mexico’s national drink grew rapidly over the past decade as the spirit went mainstream in the US, partly thanks to celebrity-backed brands such as George Clooney’s Casamigos.

But demand has fallen over the past 18 months as the pandemic spirits boom subsided and consumers cut back on their drinking in response to higher prices.

The volume of spirits sold in the US in the first seven months of the year shrank 3% compared with the same period last year, according to drinks data provider IWSR. Tequila consumption fell 1.1%, compared with a 4% rise in 2023 and a 17% rise in 2021, the height of the tequila surge.

Though some of the inventory is in the process of being aged, rather than just awaiting bottling, tequila evaporates rapidly compared with other ageing spirits — partly because of Mexico’s warm climate — meaning that most tequila is not left in barrels beyond three years.

To add to the industry’s woes, Trump has threatened Mexico, the US’s biggest trading partner, with a 25% tariff on its goods. That would be devastating to the industry and to Mexico’s economy, which relies on its northern neighbour to buy 83% of its exports.

“It would be shooting themselves in the foot because their consumers would have to pay much more,” said Tequila Regulatory Council president Ramón González.

Two-thirds of all tequila produced in Mexico was exported in 2023, and 80% of that was shipped to the US, according to the group, which ensures products adhere to specifications and protects the spirit’s designation of origin.

Tequila’s largest export markets after the US last year were Spain and Germany, which each made up just 2%.

González said there was broad concern about the potential tariffs but played down their likelihood, pointing to the increased investment in tequila by US companies and to Trump’s previous threats that did not materialise during his last term in office.

“When he was president...he said exactly the same thing, that there would be tariffs et cetera,” he said. “Not only did he not put taxes on alcoholic drinks, he lowered them,” he said, referring to 2017’s Tax Cuts and Jobs Act, which reduced tax rates on alcohol produced or imported to the US.

Two of the largest tequila brands, Bacardi-owned Patrón and Casamigos, which is now owned by London-listed Diageo, have been cutting prices for more than a year in response to weaker consumer demand, according to research by Bernstein.

At the same time, tequila producers have gained from cheaper raw material prices, including for agave, the plant from which tequila is made.

“There is oversupply at the moment of several times what the industry needs, and probably some of these plantations won’t be sold looking at the industry numbers,” González said.

The price of agave has plummeted from about 30 pesos per kilo to between six and eight pesos for suppliers with contracts, or as low as two pesos on the spot market, according to producers and farmers.

“It would be a big blow to category economics if the financial upside from falling agave prices was competed away by high-end price wars,” said Stirling.

Written by: Madeleine Speed and Christine Murray in Guadalajara

© Financial Times