:max_bytes(150000):strip_icc()/offtake-agreement.asp-final-12268bd89d504498835f6e6ed3776d5e.png)
portions of the producer's upcoming goods." width="4000" height="2700" />Troy Segal is an editor and writer. She has 20+ years of experience covering personal finance, wealth management, and business news.
Updated July 01, 2024 Reviewed by Reviewed by Khadija KhartitKhadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder.
Fact checked by Fact checked by Yarilet PerezYarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.
The term offtake agreement refers to an arrangement between a producer and buyer to purchase or sell portions of the producer's upcoming goods. Offtake agreements often help selling companies acquire project financing for future construction, expansion projects, or new equipment through the promise of future income and proof of existing demand for the goods. They are normally negotiated in volatile markets before a company builds its factory or facility to secure a position in the market and a future revenue stream.
portions of the producer's upcoming goods." width="4000" height="2700" />
An offtake agreement is a legally binding contract between a buyer and seller. It can take the form of a purchase agreement for the buyer or a service contract for the seller. The contract's provisions usually specify the purchase price for the goods and the delivery date, even though the agreement is reached before any goods are produced and any ground is broken on a facility.
The offtake agreement is commonly used in project financing, which is why it serves an important role for the producer. Producers can face issues if they have no cash flow—especially when production hasn't even started and/or when they are trying to secure a production facility. Offtake agreements make it easier to obtain financing to construct a facility. If lenders can see the company has clients and customers lined up before production begins, they are more likely to approve the extension of a loan or credit.
The arrangement provides a guarantee that there will be a steady supply of goods and services to meet the demands of consumers. But if there are issues before production begins, companies can usually back out of an offtake agreement through negotiations with the other party and with the payment of a fee.
Offtake agreements are frequently used in markets that tend to be volatile. This includes energy, oil, mining, and natural resource development. The capital costs related to the extraction of resources in these markets are often significant. By obtaining an offtake agreement the selling company hopes to secure a guarantee that some of its products will be sold. They are also common to finance major projects, such as real estate development and infrastructure.
Most offtake agreements include force majeure clauses. A force majeure clause removes liability from one or both parties in a contract if there is a serious, unforeseeable external event that prevents both parties from living up to their contractual obligations. These clauses may also be enforced if one party puts unnecessary hardship on the other.
Force majeure clauses often protect both parties against the negative impact of certain acts of nature, such as flooding, wildfires, hurricanes, earthquakes, pandemics, terrorist attacks, war, and conflict.
Offtake agreements also include default clauses that outline the recourse that either party has in case there is a violation of one or multiple clauses. This includes penalties that must be paid to the supplier if the buyer violates the contract and vice versa.
The following are some of the most common types of offtake agreements used by producers and buyers:
Offtake agreements provide a guaranteed market and source of revenue for a company's product. But that isn't the only benefit. They also allow the producer or seller to guarantee a minimum level of profit for their investment. Since offtake agreements often help secure funds for the creation or expansion of a facility, the seller can negotiate a price that secures a minimum level of return on the associated goods, thereby lowering the risk associated with the investment.
Offtake agreements may provide a benefit to buyers as well, functioning as a way to secure goods at a particular price. That means prices are fixed for the buyer before they are manufactured. Doing this may act as a hedge against future price changes, especially if a product becomes popular or a resource becomes scarce, causing demand to outweigh supply. It also provides a guarantee that the requested assets will be delivered: fulfillment of the order is considered the seller's obligation under the terms of the offtake agreement.
Offtake agreements are legally binding financial contracts, which means that both parties are obligated to live up to their promises. Most contracts include provisions if one party must back out. For instance, they may negotiate and cancel the contract if one party pays the other a penalty or fee.
These agreements may also be canceled in the event of unforeseen circumstances under force majeure clauses. The liability of one or both parties is removed under certain circumstances, such as natural disasters, pandemics, and/or conflicts.
The term supply chain refers to a network of entities involved in the creation and delivery of a product or service. This chain begins with those who produce and supply raw materials to producers and ends with the entities who deliver goods to the end user or consumer. The supply chain includes producers, suppliers, and retailers. It also includes warehousers, transportation companies, and distributors.
A force majeure clause is a provision included in many contracts that absolves one or more parties of their liability in the event of an unforeseen circumstance. These acts, which are commonly referred to as acts of God, including natural disasters (earthquakes, floods, hurricanes, and wildfires), conflicts (war and terrorist attacks), and pandemics.
Companies may find it difficult to secure financing for their projects, especially if they are capital-intensive and don't have a manufacturing facility in place. Offtake agreements take some of the pressure off these producers, with companies promising to buy their goods once they are manufactured. These contracts give producers access to the money they need (and future financing they may require from lenders) to manufacture their goods while guaranteeing market prices for buyers. If one or both parties can't live up to the contract, they may negotiate its cancelation with the payment of a fee.
