what is an offtake agreement 
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 understanding offtake agreementsan 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 special considerationsmost 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 types of offtake agreementsthe following are some of the most common types of offtake agreements used by producers and buyers benefits of offtake agreementsofftake 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 can parties break an 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 