Expected surge in Chinese demand should boost Mexico's tequila exports by 20% within a decade, says Mexican government official

Nevin Barich

AMATITAN, Mexico , February 11, 2014 (Thomson Reuters Corp.) – An expected surge in Chinese demand should boost Mexico's tequila exports by 20 percent within a decade, according to the regulator of the country's signature cactus-based liquor, and producers are gearing up for a boom.

On a visit to Mexico last August, Chinese President Xi Jinping lifted a ban on imports of premium blue agave tequila. China had objected to the relatively high levels of methanol in blue agave tequila, produced from fibers in the cactus' leaves.

Since the ban was lifted, Mexico has exported nearly 520,000 liters of mostly premium tequila to China, said Ramon Gonzalez, director of the national tequila regulator.

"I expect ... 30 million liters within the next 10 years," said Gonzalez, estimating that each of Mexico's 16 major tequila producers had invested up to $3 million to enter the Chinese market.

Foreign diplomats and trade officials also expect strong growth in the sector thanks to China.

Mexico currently exports about 170 million liters a year with just under 120 million liters heading to the United States. The expected Chinese demand would expand the industry by nearly 20 percent from current export levels.

Much like French Champagne or Italian Parmesan cheese, blue agave tequila has a protected designation of origin and can only come from five Mexican states: Jalisco, Guanajuato, Michoacan, Nayarit and Tamaulipas.

LOCAL HACIENDAS, GLOBAL BRANDS

Most of Mexico's oldest and largest tequila-producing haciendas are now controlled by foreign owners, many of whom already have a presence in China.

The Hacienda San Jose del Refugio, sandwiched between the rolling hills speckled with blue agave plants that encircle the small town of Amatitan near the western Mexican city of Guadalajara, is owned by Brown-Forman Corp. <BFb.N>, the U.S. maker of Jack Daniel's whiskey.

The leafy, sun-dappled estate is home to Mexico's second-largest tequila producer, Herradura. The hacienda, which also produces the El Jimador brand of tequila, is already gearing up for the China push.

Hector Quirarte, Herradura's head of institutional relations, said the company, which already exports a small amount of the low-end Pepe Lopez tequila to China, had invested $8 million in the plant in the last six years to give it a potential output of 100,000 liters a day.

"We're getting ready to go full throttle into China," he said, noting that Herradura is helped by the fact that Brown-Forman already has a toehold in China thanks to Jack Daniel's.

"We already have the capacity, that's not a problem. If we need to make more investments to support the growth, which we expect to be so strong, we're ready to do it."

There are signs big distillers are eyeing tequila companies with renewed interest, banking on the expected Chinese boom and growing U.S. demand.

Last month, Britain's Diageo <DGE.L>, the world's biggest spirits maker, bought the high-end tequila brand Peligroso, giving the firm a foothold in super premium $20-$40 tequila, the fastest growing tequila segment in the United States, according to Nielsen.

That came after Diageo pulled out of talks to buy a stake in top-selling tequila brand Jose Cuervo in 2012, forcing Mexico's No. 1 producer to use its own family-owned U.S. distributor to sell the spirit in the United States and Canada.

GROWTH SPURT

The expected growth in China follows two decades of increasingly global growth in the tequila industry.

According to Gonzalez there were 300 tequila brands about two decades ago and the drink was exported to 30 countries. Today, he said, there are 1,600 certified brands and exports reach nearly 120 countries.

But obstacles remain before the Mexican tequila industry can reach its expected Chinese goal. Because it takes seven to 10 years for an agave cactus to reach maturity, forecasting future demand becomes a challenging task.

"If demand is so heavy, where are we going to get the agave to deliver that high capacity?" he asked. "We do have it, but only for the market as it is right now."

(Reporting by Gabriel Stargardter; Editing by Simon Gardner and Alden Bentley)

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