Offtake Agreement - Explained
What is an Off-Take Agreement
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What is an Offtake Agreement?
An offtake agreement refers to an agreement where a buyer and a manufacturer decide to either buy or sell specific portions of the products that the manufacturer will produce in the future. Generally, such agreements are finalized before the production starts. For instance, a mine will need a market where it can sell its prospective output. Such agreements are very crucial for the manufacturer. It becomes easier for them to borrow money from banks or financial institutions for the production that already has a buyer prior to production.
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How Does an Offtake Agreement Work?
Offtake agreements are legitimate agreements binding activities between sellers and purchasers. These agreements come into existence before the products are set for production. They usually help the seller or manufacturer to obtain adequate funding for prospective production or further expansion. He/she can present it as an evidence that he/she will generate prospective income from the products, and will have a market to sell his products. Offtake agreements are popular in natural resource development where huge capital costs are incurred for extracting resources, and the firm wants an assurance that at least some part of its production will be readily sold. If a buyer wants to be out of an offtake agreement, he/she can do so by making negotiations with the seller, and paying a specific fee. These agreements come with default clauses which mention penalties that the defaulter would be incurring if there is a breach of minimum one clause.
Benefits of Offtake Agreements for Sellers and Buyers
Besides offering an assured market and source of income for the product, offtake agreements enable seller to be confident of having at least some amount of profit on his/her investment. As seller uses these agreements to develop or grow his/her business in the coming years, he/she can make price negotiations to an extent that safeguards at least some return on the related products, and reduces the risks concerned with the investment. Considering the buyers side, it gives them the advantage of securing a specific price prior to the manufacturing process. This can be referred to as hedging against fluctuations in future prices in case of excess demand. Therefore, the prices for a particular product remain fixed for the buyer prior to the offtake agreement. This helps buyers more if there are chances of the prospective product being popular in future. Further, it acts as a guarantee that the buyer will be receiving the said assets, as it is the obligation of a seller to make deliver order.
Offtake Agreements and Force Majeure Clauses
Majority of offtake agreements consider including force majeure clauses which enable both the parties, buyer or seller for cancelling the agreement in case of uncontrollable circumstances. This can happen with either of the parties. When one party feels that the other party is making things unnecessarily difficult for them, they can use this clause. It offers a sense of security against natural calamities such as storms, floods, wildfires, etc.
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