Offtake agreements are a crucial component of the supply chain for many businesses. If you’re not familiar with the concept, an offtake agreement is essentially a contract between a seller and buyer that defines the terms of purchase over a fixed price and a fixed period of time. It is common in industries where markets tend to be volatile and fluctuating, such as oil and other energy sources.
Offtake agreements are basically long-term contracts that provide assurance to the seller and buyer in terms of supplying a certain product in future. It is the piece of paper that sets out the obligations of both parties, where the seller agrees to provide supplies to the buyer, who then purchases them at fixed prices over the term of the contract. The agreement can last one year or much longer—sometimes even decades.
An offtake agreement guarantees that both parties will have access to consistent supplies and demands. This provides stability and certainty for both parties, that are often lacking in markets of high volatility. For example, when oil prices are low and demand is high, it’s difficult for producers to predict whether or not they’ll keep up with rising demand as prices continue to rise. Therefore, offtake agreements are the only way to mitigate risk when producing large volumes of goods for sale based on future demand projections. Also, it can serve in the financing process for producers when banks aren’t willing to lend them money based on their current financial statements or cash flow projections. I.e., presenting a ten-years offtake agreement to the bank could remove several barriers, especially when sellers need to raise capital to begin their new manufacturing business. For example, if you’re in the business of producing lumber and selling it to home improvement companies like Home Depot or Lowe’s, you can use those contracts as proof of future demand to secure loans from banks or raise funds from investors.
In order to have an offtake agreement that meets your company’s needs, you should consider how the agreement handles fees and penalties so that they apply reasonably and appropriately in all situations. Look for a simple structure with clearly-defined elements instead of a complex agreement with excessive clauses. Here are key features of an offtake agreement that you should include:
- A specified volume: You must state the committed buy-side quantity that can be adjusted over time to reflect updates in market demand.
- A price benchmark: You can mention a fixed price or link the price to a published or quoted price index or a formula based on multiple benchmarks.
- Delivery schedule: The delivery schedule could be a schedule with no fixed dates. You can mention that delivery is subject to availability or when requested by the customer, and then you can list any other specific details related to the delivery process.
- A reference to where the manufacturing facility is located must be stated in the agreement. This is important because it affects how far the goods need to travel before they can reach the buyer’s destination. It affects the transportation fee and also what modes of transportation can be used. Overall, the delivery process in offtake agreements is a key part of these agreements because it shows how the parties will transfer the title of goods. This makes it crucial that all parties understand how this will work, and how they will be held responsible for not fulfilling their roles in the process.
- Other terms and conditions: These can include indemnities, insurance, payment terms, security arrangements and guarantees.
Several key features you should consider as part of any offtake agreement. Not all of them may be applicable to your situation, but by identifying the relevant ones upfront, you will minimise the chances of entering into an agreement that is unbalanced or unfair for one or both parties. It is best for you and your business partner to strive for a clear understanding of what each party brings to the table and what each party can expect out of the arrangement so that everyone understands their obligations before signing on the dotted line.