Minyanville.com: Adios, Tequila? Agave loses to Corn Prices

Interesting article today on Minyanville.com about the impact of rising Corn prices due to the increase demand for food and ethanol. As a result, some farmers in Mexico are abandoning the blue agave plant in order to grow corn.

Here's the scoop:
The sun may be setting on the Tequila Sunrise, the drink of choice for undergraduates behaving badly on those Spring Break trips to Mexico.

Kids aren't suddenly joining the Temperance Union or coming down with an unexpected outbreak of maturity - it's just the free market at work.

Corn prices are rising, driven by increased demand for food and ethanol. As a result, some farmers in Mexico are abandoning the blue agave plant in order to grow corn.

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The agave is the raw ingredient of Mexico’s tequila, including Jose Cuervo and Don Julio (DEO). But the plant takes 5 to 7 years to mature, and farmers can cash in now by growing corn and beans, USA Today reports.

East of Guadalajara, overripe agave plants are left in fields to rot because they’re not worth harvesting at the current price (about $0.02 a pound). In 1997, a frost killed millions of agave plants; by 2002, prices soared to $0.80 a pound.

Farmers devoted more land to the crop in an effort to cash in, but the market quickly became glutted and prices fell. It’s now more profitable to plant corn, which sells for about $0.18 a pound in Mexico.

The switch to corn and other crops could drive up the cost of a shot of tequila in the future, making a margarita an indulgence rather than an undergraduate staple.

During the last agave shortage in 2001-2002, some distillers added other types of alcohol to tequila to boost volume. Tequila must contain 51% pure agave to carry the name.

Distillers are stockpiling tequila to prepare for what may be a looming agave shortage. But the future of shot contests isn’t hopelessly bleak: Some growers are turning their attention to younger agave plants, should prices rebound.

There are no definitive statistics on the acres planted to agave, corn or beans, but farmers in Mexico say they’ve noticed a widespread move to the higher-paying crops and away from agave.

In the US, Congress mandates the use of ethanol as an alternative fuel. This creates a guaranteed market, but the rising cost of corn has hammered ethanol stocks. The market has turned thumbs down on ethanol producers such as VeraSun (VSE), Aventine (AVR) and Pacific Ethanol (PEIX). Archer Daniels Midland (ADM) has also taken a hit.

Use of ethanol allows oil companies to boost octane more cheaply than additional refining. But ethanol doesn’t make sense as an alternative fuel, since it takes more energy to produce a gallon of ethanol than the biofuel itself contains. Any economic benefit from ethanol is a myth.

Increased demand for ethanol has led to clearing rainforests in Indonesia, Malaysia and Thailand to plant oil palm, a highly productive oil seed used to make biofuel.

It’s bad enough that plantings for biofuel threaten the natural habitat of orangutans, but now agaves? File that under: Ruining tequila for everyone.

The new battle cry among undergraduates and other tipplers: Tequila, si! Corn-based ethanol, no!

SOURCE: http://www.minyanville.com/articles/corn-agave-ethanol-tequila-ADM-peix/index/a/18678