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 upcoming goods. It is normally negotiated before the construction of a factory or facility to secure a market and revenue stream for its future output..

Offtake agreements are typically used to help the selling company 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.

FEATURES

• They are legally binding contracts related to transactions between buyers and sellers.
• The provisions usually specify the purchase price for the goods and delivery date, even though the agreement is reached before any goods are produced and any ground is broken on a facility.
• Companies can usually back out of an offtake agreement through negotiations with the other party and with payment of a fee.
• They are used in natural resource development, where capital costs to extract resources are significant, and company wants a guarantee that some of its products will be sold.
• It makes credit more easy.
• Ensures a minimum level of profit.
• Functions as a way to secure goods at a particular price.
• Act as a hedge against future price hike.