Mexican Wines: Improving Quality But Declining Value

When you think about Mexico, your mind goes to tequila and beer.  Yet, Mexico is the oldest wine-growing region in the Americas (450 years).  Mexican wines are good and getting better.   Mexican vineyards currently cover 6,474 hectares, with 72% of Mexico’s entire national wine production concentrated in just four states.  Baja California — home to the country’s premier wine region the Valle de Guadalupe — produces almost 90% of all Mexican wine.  Located just south of San Diego, it offers a growing region similar to prime wine cultivation areas in Spain, France and Southern California.  It’s no surprise Spaniards who arrived in the 16th Century noticed the similarities in the quality of the climate and soil. They immediately began importing Spanish vines into the newly-conquered country.

There’s big money in Mexican wines.  The Mexican government estimates that Baja wine production may double over the next decade.   Given the almost quarter of a billion dollars generated by Mexican wineries each year, it’s a safe bet that the Mexican government will be supporting its nascent wine industry.

Over the past twenty years, we’ve been monitoring the Baja wine region’s output.  There’s no doubt that the quality (and quantity) of wine is improving.  When we started sampling Baja wines, production was dominated (and still is) by the larger wineries like L.A. Cetto, and Santo Tomas (which started grape growing in 1888) and smaller wineries who were only interested in producing low-quality value wines. In the last decade some new wineries have emerged and are producing some very decent wines:  Torres Alegre, Hacienda La Lomita, Adobe Guadalupe, Las Nubes, La Lomita Winery, Monte Xanic and Villa Montefiori are just seven of over 70 wineries who are producing what might be called craft-wine.  This is very good wine that rivals some of the better U.S. West Coast wineries.

We recently tasted The 2014 Lomita ‘Pagano’ (grenache-based), the 2005 Adobe Guadalupe ‘Serafiel’, the 2006 Torre Allegre ‘Cru Garage’ (also grenache-based) as well as its ‘La Llave Tinta’ (cabernet-based).   All of these wines deserved 90+ scores.  But they were all being sold for between $40-70 per bottle.  Yikes!   At that price, they simply don’t offer the necessary Quality To Price Ratio (QPR) proposition that American consumers demand from winemakers.

However, as good as the Baja wine is drinking, the QPR proposition is hamstrung by a 42% federal tax on all Mexican wines.  The origin of this deal-killing tax is the Mexican government’s concerns about its beer and tequila industries.    Fortunately, passage of a 2017 law may bring some relief to Mexican wineries.   Passage of a new law is predicted to drop the taxes down to the 25% level (or thereabouts).   But this may not be as helpful to the Baja wineries as would have been hoped.   At almost precisely the same time, the U.S. government also dropped wine taxes — for the first time in over 80 years.

The Craft Beverage Modernization and Tax Reform Act (H.R. 747/ S. 236) was included in the large tax reduction passed at the end of 2017. It will reduce excise tax payments for almost every winery in the country by expanding the value of the existing producer credit and doing away with the phase-out that currently prohibits many wineries from receiving any benefit. The excise tax burden for small- and medium-sized wineries will be reduced by 55%-70%. The wine provisions go into effect on Jan. 1, 2018, parallel to the Mexican tax reduction.  It is too early to tell how this will impact the Mexican QPR.  But it will certainly impede Baja’s efforts to get its excellent craft wines into the U.S. wine market.

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