Mexican President Andrés Manuel López Obrador called for the halt of beer production in North Mexico on Monday. The region is home to several major beer companies, including Heineken and AB InBev’s Grupo Modelo. In the announcement, President Lopez Obrador stated that Mexico will still support beer production in the south or southeastern areas of the country, Fortune reports.
A lack of precipitation and the cooling cycle of La Niña have caused a summer drought in Latin America. It proves a dire situation for northern residents who have had to line up for hours to receive clean water.
In early July, the country’s National Water Commission declared a drought emergency, as lack of precipitation in the central and northern regions reached critical levels. The emergency designation allowed Mexico’s government to take action in conserving water, according to the Associated Press.
Sixty percent of northern Mexico’s water supply comes from reservoirs in normal conditions; as the La Niña drought worsens, it threatens the residential supply.
While this may appear to be an alarming signal of a changing climate, it’s not the first time that the Mexican president has taken action for water conservation and might be part of a broader political strategy. As Beer Business Daily writes in its Aug. 9 newsletter, López Obrador previously halted Constellation from constructing a production center in northern Mexico after residents voted against a water-guzzling manufacturing center. Earlier this year, however, the drinks giant secured water rights to construct a production facility in the south east of the country.
As the summer draws to a close, an end is not yet in sight. Northern Mexico usually experiences more rainfall in late August, however, depending on several climate conditions, that relief may be delayed.
After the news from Lopez Obrado, investment bank Evercore released a note, stating that “the only thing that seemed clear is that the Mexican government will no longer be granting new permits for beer production in the region.”
In terms of the Constellation impact, the note included this analysis:
From what we can tell, AMLO’s comments regarding the water shortage do not mean that he is in favor of forcing STZ to shut its breweries in the North. That said, the odds of STZ being asked to reduce production and/or rethink certain expansions may have increased due to the prolonged and severe drought.
In our view, if there are constraints on STZ’s production in the North, there are several options, including 1) more aggressive pricing actions in the U.S. to slow demand, 2) some sort of joint production agreement with ABI / HEIA, 3) shifting expansion plans from Nava / Obregon in the North to Veracruz in the South, and 4) exploring production opportunities outside of Mexico to the extent the firm’s agreement with ABI allows.