Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Offtake Agreement

What it is:

An offtake agreement is an agreement between a buyer and seller of a resource to purchase or sell products that are yet to be produced.

How it works (Example):

Let's say Company X developed a way to grow a special kind of popcorn that turns purple when popped. However, it is unsure how much purple corn will grow per acre of land. It is about to invest millions of dollars in farmland and equipment in order to start growing the corn.

Company Y is a snack-food producer. It loves the purple popcorn idea and wants to put it in its various products. Accordingly, it enters into an offtake agreement with Company X, whereby Company Y agrees to purchase all of Company X's production of purple popcorn next year.

By doing so, Company X gets some reassurance that its big investment will yield at least one customer. This improves its chances of getting financing to buy the farmland and equipment.

Why it Matters:

Offtake agreements are normally entered into before production begins. They are common in the mining industry, but as you can see, they can work in many situations.