July 23, 2000

Tequila prices skyrocket as producers face shortage of its key ingredient

                  MEXICO CITY (AP) -- After a five-year bash that saw global tequila
                  consumption nearly double, liquor producers are waking up with pounding heads
                  -- unable to keep up with tequila demand even as prices soar.

                  Squeezed by a severe shortage of the blue agave used to make the potent spirit,
                  prices are skyrocketing for the cactus-like plant as well as for your favorite
                  tequila, if you can still find it at the liquor store.

                  Relief could be years away.

                  "Nobody ever imagined demand would reach these levels," said Ramon Gonzalez,
                  head of Mexico's Tequila Regulatory Council, which oversees the industry.

                  Tequila's star began to rise in the early 1990s, with Mexican production nearly
                  doubling to top 50 million gallons in the five years through 1999. About half was
                  exported -- 80 percent of that to the United States, where tequila is now an
                  established party drink.

                  Driving the shortage even more than the boom in tequila consumption is the
                  re-education of the global palate.

                  All tequila must be made with at least 51 percent blue agave grown in specified
                  areas of Mexico. Used to be, almost all tequila merely met the minimum, and was
                  completed with cheaper distilled sugar cane. Brands like Sauza and Jose Cuervo
                  posted strong sales with such brews, which often are used to make margaritas.

                  But over the last half decade, many consumers have demanded the finer and
                  more expensive 100 percent agave "sipping" tequilas. Between 1995 and 1999,
                  overall production of pure agave tequilas rose 300 percent, while exports shot up
                  600 percent.

                  Add in agave plants destroyed by a 1997 fungus plague, and you explain today's
                  supply crisis and its price rises.

                  The number of blue agave plants in Mexico dropped by nearly half to 107 million
                  this year from 1997, according to the National Tequila Chamber. That pushed
                  down tequila production growth to 9 percent from an average 16.5 percent the
                  last five years.

                  "Before we made spoken arrangements to buy from the agave growers, but now
                  even a written contract can mean nothing, as there is always someone willing to
                  offer more money," said Jaime Orendain, who owns a pure tequila distillery
                  called Azteca de Jalisco.

                  Orendain said he now pays up to $1,050 for a ton of agave. That's nearly 20
                  times more than he paid last August.

                  The consumer is feeling the pinch.

                  Orendain estimates the agave shortage already has pushed up tequila prices by
                  about a third. He confesses to a similar price hike in his own Arette brand -- to
                  around $18 a liter in Mexico and $40 in the United States.

                  The shortage of agave is far from obvious when you look out over the misty
                  blue plantations covering Mexico's tequila-producing region, centered in the
                  eastern state of Jalisco.

                  But agave needs seven to 10 years to mature, and the spiky tufts you see are too
                  young to produce the sugary juice that is extracted from the plant's huge
                  pineapple-shaped core, fermented and then distilled twice to become tequila.

                  "It didn't occur to anyone to invest in planting agave seven years ago, when there
                  was overproduction and prices were rock-bottom," Gonzalez said.

                  Last year, Orendain's mid-sized distillery produced 1.3 million gallons of 100
                  percent agave tequila for sale in Mexico, the United States, Central America and
                  Hong Kong. This year, he expects the agave crunch to force him to cut
                  production by 20 percent.

                  He said his company isn't at risk of going under, but that many small-scale
                  producers are in trouble because they can't pay the raw material prices in this
                  seller's market.

                  "The boom came without anybody thinking it through properly, and now what?
                  We are all left crying," said Jorge Ruiz, owner of the small La Escondida
                  distillery founded by his grandfather in 1920.

                  The disgruntled tequila veteran has his survival strategy. He will do everything
                  possible to satisfy one regular European order, and sell anything left to the major
                  tequila players who are busily buying from smaller producers to keep open their
                  thirsty new markets.

                  Most of the top tequila companies are linked to major beverage multinationals.

                  Jose Cuervo, producer of the best known tequila outside Mexico, is 45 percent
                  owned by United Distillers of Britain, which also sells Johnnie Walker whiskey
                  and Smirnoff vodka. Another British concern, Allied Domecq, owns the
                  well-known Sauza brands, while the U.S. firm Brown-Forman owns 33 percent
                  of Orendain Tequila, another top-selling name. Don Julio, considered one of
                  Mexico's finest tequilas, is part-owned by Seagram.

                  Companies of this size are able to ride the crisis in part by increasing promotion
                  of their mixed-sugar tequilas. Even Herradura, a major brand of pure tequila,
                  intends to introduce a mixed variety.

                  "The liters must be kept up, so the categories are being reshuffled. The industry
                  is not going to die, but it is going to change," said Gonzalez, the Regulatory
                  Council chief.

                  He said the future of tequila is safe as long as agave growers and liquor
                  producers plan ahead to break the oversupply-undersupply cycle.

                  It would be a major mistake, to even temporarily relax the rule that tequilas
                  contain at least 51 percent agave, he added.

                  Behind his desk, Gonzalez keeps a collection of foul-smelling fake tequilas with
                  very little, or zero, agave content that he vows will never legally bear the name of
                  tequila. He shows off his favorite, a bottle adorned with a vulture in dark glasses
                  and a Mexican hat.

                  "It rots your gut and gives you the message, 'Let's go crazy,"' he said.