Guaranteed Off-take Agreements

Procurement Low Ambition Farmer Organisation Off-taker

Definition

A Guaranteed Offtake Agreement is a contract between a producer and a buyer that ensures the purchase of an agreed amount of future produce. This agreement reduces risks for farmers, incentivises new investments in the farm, and enables better production planning. For companies, it builds trust with farmers, helping meet supply commitments and secure new markets. These agreements may function as a vital enabler for the long-term investments required for transitioning to environmental farming practices.

Lead Actors

Farmer Organisation; Off-taker

Target Demographics

Farmer Organisations; Farmers

Objectives addressed

Farmer related

Improve yields: Guaranteed offtake agreements can increase yield by enabling farmers to invest in their farms. By investing in their farms, farmers can expect higher yields.

Increase farmer income: Guaranteed offtake agreements increase incomes by improving farmers' ability to invest in their farms which in turns leads to higher income.

Improve market access: Guaranteed offtake agreements enhance farmers' market access by ensuring a committed buyer for their produce, minimising the risk of unsold goods.

Strengthen income stability: Guaranteed offtake agreements can strengthen farmers' income stability by ensuring a fixed buyer for their produce, which contributes to better production planning, encourages farm investments, and enables more predictable earnings over time.

Boost access to finance: Guaranteed offtake agreements can be used to reduce farmers' credit risk, as the expected income increase the farmer's probability of repaying their loan, and thereby improving their access to financing from a financial institution.

Business related

Address sourcing needs: Guaranteed offtake agreements help buyers secure their sourcing needs by committing farmers to deliver specified volumes and quality of goods at agreed times, allowing buyers to better predict and manage supply consistency and reliability.

Improve sourcing efficiency: Guaranteed offtake agreements can improve a buyer's sourcing efficiency by providing clear commitments on volumes, timing, and quality, which simplifies logistics and reduces transport costs.

Increase revenues: Guaranteed offtake agreements can increase buyers' revenue by ensuring a stable and predictable supply of produce, which supports consistent sales and helps fulfill market commitments. By building trust and enabling better production planning, these agreements also open opportunities to secure new markets and expand sales channels.

Lower credit losses: Guaranteed offtake agreements can reduce a buyer's credit losses by ensuring guaranteed farmers' income, which lowers the risk of non-repayment of input loans or other credit, thus minimising the impact of farmer defaults.

Reduce side-selling: Guaranteed offtake agreements can enhance a buyer's supply security by securing commitments from farmers, ensuring the buyer has access to the necessary volume and quality of goods when needed, thereby reducing the risk of supply disruptions.

Contexts Best Suited to

Tight supply chains: where the number of buyers is limited.
Supply chains where competition is high: where contracted terms can deter side-selling.
Areas where access to market is limited: to incentivise farmers to produce.

Key Risks

Market volatility: Lower upstream market demand can affect the buyers ability to comply with the contract.
Price Volatility: Fluctuations in market prices can impact the profitability of the agreement for both parties. If market prices drop significantly, the buyer may find the agreed price too high, while if prices rise, the seller may feel they are not getting fair value.
Contractual Breach: Either party failing to fulfil their contractual obligations (e.g. non-delivery of goods, late deliveries, failure to meet quality standards, side selling) can lead to disputes and financial losses.