What Is an Offtake Agreement?
An offtake agreement is an agreement between a producer and a buyer to purchase or sell portions of the producer's future production. An offtake agreement is normally negotiated prior to the construction of a facility—such as a mine—to secure a market for the future output of the facility.
The offtake agreement serves an important role for the producer. If lenders can see the company has a purchaser before production begins, an offtake agreement makes it easier to obtain financing to construct a facility.
Understanding Offtake Agreements
Offtake agreements are legally binding agreements related to transactions between buyers and sellers. The agreements are reached before any goods are produced and any ground is broken on a facility.
They are typically used to help the selling company acquire financing for future construction or expansion projects through the promise of future income and proof of an existing market.
Offtake agreements are frequently used in natural resource development, where the capital costs to extract resources are significant and the company wants a guarantee some of its product will be sold.
Companies can usually back out of an offtake agreement through negotiations with the other party and with the payment of a fee.
[Important: Offtake agreements also include default clauses which outlines the recourse—including penalties—either party has in case there is a violation of one or multiple clauses.]
Benefits to Both Sellers and Buyers
In addition to providing a guaranteed market and source of revenue for its product, the seller can 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, therefore lowering the risk associated with the investment.
Offtake agreements may provide a benefit to buyers, functioning as a way to secure a particular price before production. This may act as a hedge against future price changes if demand outweighs supply. That means prices are fixed for the buyer before the offset agreement is set in place, especially if a product becomes popular. It also provides a guarantee that the requested assets will be delivered, as delivery is considered the seller's obligation.
Offtake Agreements and Force Majeure Clauses
Most offtake agreements include force majeure clauses. These clauses allow the buyer or seller to cancel the contract if certain events occur deemed outside the control of either party and if one puts unnecessary hardship on the other. This often provides protection against the negative impact of certain acts of nature such as flooding or wildfires.