[Federal Register Volume 59, Number 234 (Wednesday, December 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30084]


[[Page Unknown]]

[Federal Register: December 7, 1994]


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DEPARTMENT OF AGRICULTURE

Food and Consumer Service

7 CFR Parts 250 and 252

RIN 0584-AB30

 

Processing of Donated Foods Under the State Processing Program 
and National Commodity Processing Program

AGENCY: Food and Consumer Service, USDA.

ACTION: Final rule.

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SUMMARY: This final rule amends the Food Distribution Program 
regulations to strengthen the provisions concerning the processing of 
donated food and to increase the uniformity between the provisions 
governing the State processing program and the National Commodity 
Processing (NCP) Program. The changes incorporated in this final rule 
reflect the results of two national meetings: a meeting held to discuss 
ideas on improving the administration of the State processing and the 
NCP Programs and the Department's Paperwork Reduction Task Force 
meeting held to discuss ways to reduce the paperwork burden associated 
with the processing programs.

EFFECTIVE DATE: This final rule is effective January 6, 1995.

FOR FURTHER INFORMATION CONTACT: Beverly King, Chief, Commodity 
Processing Branch, Food Distribution Division, Food and Consumer 
Service, U.S. Department of Agriculture, Park Office Center, Room 520, 
3101 Park Center Drive, Alexandria, Virginia 22302-1594; or telephone 
(703) 305-2888.

SUPPLEMENTARY INFORMATION:

Classification

    This final rule has been determined to be not significant for 
purposes of Executive Order 12866 and, therefore, has not been reviewed 
by the Office of Management and Budget.

Information Collection

    This final rule contains information collections which are subject 
to review by the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1980 (44 U.S.C. 3501-3520). The title, 
description, and respondent description of the information collections 
are shown below with an estimate of the annual reporting and 
recordkeeping burdens. Included in the estimate is the time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed.
    Title: Technical Amendments to the State processing and National 
Commodity Processing Programs.
    Description: Recommendations made by the Paperwork Reduction Task 
Force in August 1990 and subsequently incorporated into USDA's 1990 
Report to Congress were included in this final regulation. As a result, 
the reporting and recordkeeping burden hours associated with four 
program areas will be reduced under this final regulation. The 
reporting and recordkeeping requirements identified below have been 
submitted to OMB for approval and are not effective until such approval 
is obtained and OMB has assigned a control number.
    The OMB control numbers assigned to the existing recordkeeping and 
reporting requirements were approved by OMB for Part 250 under control 
number 0584-0007 and for Part 252 under control number 0584-0325.
    Description of Respondents: Distributing agencies, school food 
authorities, and commercial food processors.

    State Processing Program Description of Respondent's Estimated Annual Reporting and Recordkeeping Burdens   
----------------------------------------------------------------------------------------------------------------
                                                                            Annual       Average                
                         CFR Part                            Annual No.   frequency     burden per      Annual  
                                                            respondents    response       hours         burden  
----------------------------------------------------------------------------------------------------------------
7 CFR 250.30(c):                                                                                                
    Previous..............................................          500            1  2 hours              1,000
    Proposed..............................................          166            1  2 hours                332
7 CFR 250.30(l):                                                                                                
    Previous..............................................           57           12  2 hours              1,368
    Proposed..............................................           19           12  2 hours                456
7 CFR 250.30(m):                                                                                                
    Previous..............................................          500           12  1.33 hour            8,000
    Proposed..............................................          500            9  1 hour               4,500
7 CFR 250.30(n)(4):                                                                                             
    Previous..............................................          500            1  1 hour                 500
    Proposed..............................................            0            0  0                        0
Total Previous Burden Hours:10,868                                                                              
Total Proposed Burden Hours:5,288                                                                               
Total Difference:-5,580                                                                                         
----------------------------------------------------------------------------------------------------------------

    These programs are listed in the Catalog of Federal Domestic 
Assistance under 10.550 and are subject to the provisions of Executive 
Order 12372 which requires intergovernmental consultation with State 
and local officials (7 CFR Part 3015, Subpart V and final rule-related 
notices published at 48 FR 29114, June 24, 1983 and 49 FR 22676, May 
31, 1984).
    This final rule has been reviewed under Executive Order 12778, 
Civil Justice Reform. This rule is intended to have preemptive effect 
with respect to any State or local laws, regulations or policies which 
conflict with its provisions or which would otherwise impede its full 
implementation. This rule is not intended to have retroactive effect 
unless so specified in the ``Effective Date'' section of this preamble. 
Prior to any judicial challenge to the provisions of this rule or the 
application of its provisions, all applicable administrative procedures 
must be exhausted. This includes any administrative procedures provided 
by State or local governments. For disputes involving procurements by 
State agencies and sponsors, this includes any administrative appeal 
procedures to the extent required by 7 CFR Parts 3015 or 3016.
    The Department of Agriculture is committed to carrying out its 
statutory and regulatory mandates in a manner that best serves the 
public interest. Therefore, where legal discretion permits, the 
Department actively seeks to promulgate regulations that promote 
economic growth, create jobs, are minimally burdensome and are easy for 
the public to understand, use or comply with. In short, the Department 
is committed to issuing regulations that maximize net benefits to 
society and minimize costs imposed by those regulations.

Background

    Section 250.30 of the current Food Distribution Program regulations 
sets forth the terms and conditions under which distributing agencies, 
subdistributing agencies, and recipient agencies may enter into 
contracts with commercial firms for processing donated foods and 
prescribes the minimum requirements to be included in such contracts. 
Part 252 sets forth the terms and conditions under which the Food and 
Consumer Service (FCS) and commercial firms may enter into National 
Commodity Processing (NCP) Program contracts for the processing and 
distribution of designated donated foods to eligible recipient 
agencies.
    On May 25, 1993, the Department published a proposed rule in the 
Federal Register (58 FR 29985) which would amend the Food Distribution 
Program regulations to strengthen provisions concerning the processing 
of donated foods and to increase uniformity between provisions 
governing State processing activities, Part 250, and those governing 
NCP Program, Part 252. The proposed rule provided a 60-day comment 
period.
    This final rule addresses those provisions regarding food service 
management companies, contract renewal, requirements for processing 
contracts, liquidated damages, alternate value pass-through systems, 
invoice information, substitution of donated food, time frames for 
processors to pay refunds, refund applications/performance reports, and 
list of contracting agencies.
    Please note that a typographical error in the proposed rule 
published on May 25, 1993, (58 FR 29995) misidentified section 
250.30(k)(3) as section 250.30(k)(4). The Department apologizes for any 
inconvenience this may have caused in reviewing the proposed rule for 
comment. Throughout this final rule, the correct section number will be 
referred to when discussing provisions of that proposed rule in order 
to avoid further confusion. However, the Department recognizes that the 
current section 250.30(k)(4) is obsolete, in that it requires 
distributing agencies to notify processors of the total amount of 
donated cheese they can receive during the 1988-1989 school year. 
Because this requirement is no longer pertinent to current program 
operations, the Department is removing this language from the 
regulations.

Analysis of Comments

    The Department received a total of 41 comment letters from 
distributing agencies, local school food authorities, commercial food 
processors, a State school food service association, a private sector 
representative, the American Commodity Distribution Association, and 
the American School Food Service Association.

Food Service Management Companies

    Sections 250.3 and 250.30(a) of the proposed rule would revise the 
definition of ``processor'' and associated requirements to remove the 
blanket exception from the State processing regulations for commercial 
food service management companies. Additionally, the proposed rule 
would revise the definition of ``processor'' to exempt any commercial 
enterprises which handle, prepare, and/or serve products or meals 
containing donated foods on-site solely for the individual recipient 
agency under contract.
    With regard to the removal of the blanket exception for commercial 
food service management companies from the definition of ``processor,'' 
twenty-five comments were received. All commenters supported this 
proposal for the reasons set forth in the preamble of the proposed 
rule. The Department proposed this change because of problems 
identified in the past when food service management companies use 
commercial facilities to produce items for the various school food 
authorities under contract.
    Under the current regulations, it is often difficult to determine 
if donated food is used to produce meals for the appropriate recipient 
agency and if the value of the donated food is reflected in a reduction 
of the food service management companies' fees to the recipient 
agencies. Because these companies are exempt from the processing 
regulations, there is little the distributing agency or recipient 
agency can do to monitor commodity inventories. Based on the reasons 
set forth in the preamble to the proposed rule and the overwhelming 
response from commenters in favor of the proposal, the blanket 
exclusion of food service management companies from the State 
processing regulations is eliminated from the section 250.3 definition 
of ``processor'' and Sec. 250.30(a).
    Thirty-three comments were received regarding the proposed change 
to the definition of ``processor'' to exempt any commercial enterprises 
which handle, prepare and/or serve products or meals containing donated 
foods on-site solely for the individual recipient agency under 
contract. Thirty-two commenters were opposed to this change, primarily 
as it applied to recipient agencies. Of this number, twenty-five 
commenters believed that all recipient agencies providing meals to 
other recipient agencies, whether on-site or off-site, should be exempt 
from the processor requirements of Part 250. Several commenters stated 
that the use of commodities could be monitored satisfactorily through 
existing food distribution review standards. Another commenter stated 
that recipient agencies should be exempt from this requirement if they 
provide for accountability and value pass-through for the donated food. 
This commenter stated that this could be accomplished by ensuring that 
funds obtained from meals furnished to other recipient agencies are 
deposited into the recipient agency's food service account. Other 
commenters stated that the proposed rule defining a school food 
authority which provides meals to summer feeding programs, child and 
adult day care centers, senior citizens and others as a processor is 
not practical. One commenter stated that the definition could be 
corrected by adding a sentence to the definition that donated food 
recipient agencies which prepare their own meals on-site and prepare 
meals for other recipient agencies at the same location are also exempt 
from this definition. One commenter stated that schools and child care 
centers should not be classified as commercial food service management 
companies if they are eligible for participation as recipient agencies 
in child nutrition programs.
    The Department believes that many of the commenters' responses were 
based on the discussion in the preamble of the proposed rule which 
dealt with situations in which one recipient agency prepares meals for 
another recipient agency. A recipient agency which prepares meals for 
other recipient agencies is a food service management company under the 
definition in Sec. 250.3. The preamble stated that the Department 
believes that where a nonprofit recipient agency, such as a school food 
authority, prepares products or meals containing donated foods for more 
than one recipient agency under more than one contract in the same 
facility or prepares products or meals for any one recipient agency 
off-site, that recipient agency is operating as a commercial food 
service management company and must comply with the processing 
provisions of Part 250 pursuant to the proposed changes to the 
definition of ``processor'' in Sec. 250.3. The majority of the 
commenters stated that recipient agencies that prepare meals for other 
recipient agencies should be exempt from being defined as a processor.
    Based on the concerns raised by the commenters, however, the 
definition of ``processor'' in Sec. 250.3 of this final rule is amended 
to provide that recipient agencies which prepare products or meals 
containing donated foods for more than one recipient agency under more 
that one contract in the same facility or prepare products or meals for 
any one recipient agency off-site are excluded from the definition of 
``processor'' if the recipient agency preparing products or meals can 
provide accountability for any donated foods received from another 
recipient agency in accordance with Sec. 250.16 of the Food 
Distribution Program regulations and any funds received as payment for 
preparing products or meals shall be deposited in the meal account of 
the recipient agency preparing the products or meals.

Fee-for-Service

    Section 250.3 of the proposed rule would define the term ``fee-for-
service'' and delete the obsolete definition of ``processing fee''. 
Sections 250.30 (d) and (e) of the proposed rule would be reorganized 
to clarify refund, discount, hybrid and alternate value pass-through 
systems and to incorporate procedures for billing fee-for-service end 
products. Additionally, under Sec. 250.30(c)(4)(viii)(D) of the 
proposed rule the processing contract would require those processors 
who wished to give credit for by-products via a reduction in the fee-
for-service price to identify in the contract the specific dollar value 
amount reflected in the lowered price. Under Sec. 250.30(e)(3) of the 
proposed rule, end products containing meat or poultry, together with 
any other donated food, would be prohibited from being delivered and 
sold to recipient agencies through distributors under fee-for-service 
contracts. The proposed rule would allow end products containing meat 
or poultry and additional ingredients which are not donated foods, to 
be sold to recipient agencies through distributors under fee-for-
service contracts. The proposed rule would also permit end products 
containing meat or poultry, together with other donated food sold 
directly to recipient agencies by the processor, to be sold under fee-
for-service contracts. FCS was particularly interested in comments and 
recommendations regarding the impact this proposal would have on any 
products which were manufactured using a combination of meat and 
poultry and other donated food and sold through distributors and 
possible alternatives to the proposed rule on this point. A total of 
fifteen comments was received on the above proposals.
    Eight commenters responded to the proposed definition of ``fee-for-
service.'' Four of these commenters agreed with the definition as it 
was proposed. The remaining four commenters stated that the definition 
needed to be expanded. Three of the commenters in favor of expansion 
stated that the fee-for-service price and the free on board (FOB) plant 
price are the same prices and this should be reflected in the final 
rule. They stated that the FOB price is the actual cost of producing 
the end product, and that this price should be the same for all States; 
the only difference in price would be the cost of transportation to 
deliver the finished end products back to each State. These same 
commenters said that this concept would mean that each processor would 
only have to prepare one end product data schedule for the entire 
nation. This action would make the idea of a clearinghouse for end 
product data schedules become a reality. The other commenter wanted the 
definition of fee-for-service expanded to clearly state that it is a 
method of payment for processing services and is an alternative to a 
value pass-through system, in addition to being the price representing 
the processor's cost of ingredients, packaging, and overhead.
    The Department disagrees with the commenters that stated that the 
FOB price and the fee-for-service price represent the same figures. The 
FOB price represents the processor's cost of producing an item prior to 
shipment and delivery. FOB pricing includes the cost of all ingredients 
used in the manufacture of the product; the price reduction for donated 
food is not reflected in the FOB price. Fee-for-service, on the other 
hand, represents the cost of ingredients (other than donated food) 
labor, packaging, overhead, and other costs incurred in the conversion 
of the donated food into the specified end product. The net case price 
(the FOB price minus the commodity discount or refund for the donated 
food) and fee-for-service are equivalent prices. The Department 
believes that the definition of fee-for-service is correct as written 
in the proposed rule, and therefore, the definition is adopted without 
change in the final rule.
    Four comments, all in favor, were received in response to section 
250.30(c)(4)(viii)(D) of the proposed rule which would require the 
value credits of any by-products to be listed on the end product data 
schedule. Two of these commenters stated that they currently require 
this information to be part of the processing agreement. This provision 
is adopted without change in the final rule.
    Only one comment, which was favorable, was received on section 
250.30(e)(1)(iv) of the proposed rule which would establish new fee-
for-service billing procedures. Distributing agencies have been using 
the proposed fee-for-service billing procedures for a number of years 
without problem pursuant to a policy memo dated March 22, 1989. 
Therefore, this final rule contains these procedures as proposed.
    Two commenters were in favor of section 250.30(e)(3) of the 
proposed rule which would restrict the sale of end products containing 
both substitutable and non-substitutable (meat and/or poultry) donated 
food through distributors to either the refund, hybrid, or alternate 
value pass-through system and nine commenters were opposed. Those who 
were opposed to the proposal wanted to have the option to approve the 
sale of end products containing both substitutable and non-
substitutable donated food under fee-for-service arrangements. 
Additionally, several commenters were opposed to the use of the term 
``sold'' in section 250.30(e)(3) of the proposed rule in regard to end 
products being ``sold'' to recipient agencies through distributors. 
They stated that fee-for-service end products should be delivered but 
not sold to a distributor. One commenter stated that the word ``sold'' 
implied that any quantity of end product can be purchased by any 
recipient agency. That commenter further said that this is in contrast 
to the actual availability of a commodity and the allocation process 
that is associated with non-substitutable commodities that is used by 
FCS and distributing agencies.
    Four comments were received on the impact that the proposal would 
make on end products manufactured from both substitutable and non-
substitutable donated food and delivered through distributors. However, 
only one commenter provided a possible alternative to the proposed 
rule. That commenter stated that since distributing agencies, and 
ultimately recipient agencies, receive specific allocations of meat and 
poultry, the quantity of meat and poultry made available to a processor 
should be pre-assigned, based on a fair share apportionment and the 
recipient agency's choice. The pre-assigned end products may then be 
returned to the recipient agency through a distributor. This fee-for-
service billing process through a distributor for all end products 
containing meat or poultry which are sold through a distributor would 
be accomplished by either: 1) a dual billing system through which the 
recipient agency is billed by the processor for the fee-for-service and 
the distributor bills for the storage and delivery of end products or 
2) a system through which the processor bills separately for the fee-
for-service and the distributor's storage and delivery charges. If 
these end products should also contain substitutable foods, that 
portion of the value pass-through could be handled as a refund or 
discount, indicated on the processor's invoice. Both types of 
information could be shown on the end product data schedule. The other 
three commenters pointed out the impact that the proposal would have 
without proposing alternatives. Their comments are as follows: 1) if 
the proposed rule results in prohibiting end products containing 
protein from being sold via a distributor, unless specified by a value 
pass-through system, it could result in processors leaving the program; 
2) this proposed change may result in meat and poultry processors 
choosing not to utilize donated flour, oil, or other donated foods 
because they would be required to choose a value pass-through system 
other than fee-for-service; 3) the use of fee-for-service is necessary 
in the production of end products made with donated meat and poultry 
because of the difficulty in replacing the donated product and the 
prohibition against substitution; and 4) it is uncertain as to how the 
use of a refund or discount system instead of a fee-for-service could 
assure that there was no substitution of commercial food for non-
substitutable donated food. Due to the concerns raised by the 
commenters opposed to the proposal, section 250.30(e)(3) of the 
proposed rule will not be adopted in the final rule, and processing 
contracts may continue to be made under fee-for-service arrangements 
when such end products are delivered and sold through distributors, 
regardless of whether they are manufactured with both substitutable and 
non-substitutable donated foods.

Contract Extension

    Under sections 250.30(c)(1) and 252.4(b) of the proposed rule, 
processing contracts would continue to be required to terminate on June 
30 of each year; however, contracting agencies (or FCS in the case of 
NCP) would be given the option of extending contracts for two 1-year 
periods. Section 250.30(c)(1) of the proposed rule would also require 
that any changed information be updated before any contract extension 
is granted, including pricing and yield information, bonding 
information, and the signature page. Furthermore, section 250.30(c)(1) 
of the proposed rule would provide that contracts could be extended 
only if the processor performed satisfactorily during the previous 
year, submitted the required annual reconciliation reports and had its 
certified public accountant (CPA) audit report closed.
    A total of eighteen commenters responded to this proposal. Eleven 
commenters supported the provision as proposed. One commenter supported 
the option of two 1-year extensions, but added that requiring 
processors to submit the annual reconciliation report and requiring the 
closure of the CPA audit report as conditions for contract extension 
are not workable due to the submission and resolution time frames 
associated with these reports. Another commenter supported the option 
of two 1-year extensions but stated that the annual reconciliation 
reports should be eliminated as a condition since the proposal for 
submission of the monthly performance report with year-to-date totals 
would serve the same purpose. Four commenters were in favor of contract 
extension but recommended four 1-year extensions to make processing 
contract extensions consistent with the food service management company 
contract duration requirements under 7 CFR Part 210. Three of these 
commenters also recommended that bids should be separate and distinct 
from the processing agreement and not be subject to automatic renewal. 
Finally, one commenter stated that contract extensions would not result 
in reduced paperwork because distributing agencies would have to 
maintain separate active contract files for each year of the contract. 
This commenter added that if there were any changes from the original 
contract, the distributing agency would need to issue additional 
amendments.
    The Department continues to believe sections 250.30(c)(1) and 
252.4(b) of the proposed rule will reduce paperwork, facilitate 
contract approval, and expedite the arrangement of early commodity 
shipments directly to processors. Based on the comments on section 
250.30(c)(1) of the proposed rule, however, the Department recognizes 
that the time frames for the submission of certain reports, such as the 
annual reconciliation report or closure of the CPA audit report, cannot 
practically be conditions for contract extension. Annual reconciliation 
reports are not due to be submitted to the distributing agencies until 
after the new contract year has begun. CPA audit reports are due prior 
to extending a contract; however, the audit might not be closed at the 
time of contract extension. Typically, distributing agencies begin 
negotiating contracts for the upcoming contract year in March or April. 
Because distributing agencies need to have the most recent data 
available to them in determining whether a processing contract should 
be extended, this rule will require that distributing agencies ensure 
that any changed information must be updated before any contract 
extension is granted, including but not limited to pricing and yield 
information value, bonding information, and signature page. The 
distributing agency also must ensure that all required reports and any 
corrections to reports that are due up to the time that contract 
extension occurs have been submitted by the processor.
    Accordingly, this final rule adopts section 250.30(c)(1) of the 
proposed State processing regulations and section 252.4(b) of the 
proposed NCP regulations without change, except that section 
250.30(c)(1) is modified to provide that as a condition of extension, 
the processor must, in addition to performing satisfactorily during the 
previous year, submit all required reports and any corrections to such 
reports up to the time that contract extension occurs and submit its 
CPA audit report.

Requirements for Processing Contracts

    Section 250.30(c)(4)(ii) of the proposed State processing 
regulations and section 252.4(c)(1) of the NCP regulations would 
eliminate the requirement that the free on board (FOB) plant price be 
included as part of the State processing and NCP contracts. In lieu of 
the FOB price, the proposed rule would permit processors to provide any 
pricing information, so long as the processor thoroughly explained what 
this additional pricing information represented. The processor, 
however, under section 250.30(c)(4)(ii) of the proposed rule would also 
be required to include the contract value of each USDA commodity and 
where processing was to be performed only on a fee-for-service basis, 
as defined in the rule, the actual fee would be listed. Additionally, 
section 250.30(c)(4)(ii) of the proposed rule would require that 
information pertaining to yields and pricing of end products be listed 
on separate pages of the contract.
    A total of sixteen comments was received on this proposal. In 
response to the proposal to eliminate the FOB price from the end 
product data schedule, six commenters agreed that it should be removed 
from the regulations and four commenters stated that it should be 
retained. Commenters who supported the elimination of the FOB price 
stated that there is a great deal of confusion regarding what the FOB 
price represents. One commenter stated that FOB prices are misleading 
and believed it would be better to have a processor spell out the 
pricing mechanism as clearly as possible at the State contract level. 
Two commenters proposed eliminating all pricing information from the 
end product data schedule. One of these commenters stated that the FOB 
price causes confusion among recipient agencies and also reveals 
sensitive information to a company's competitors should they obtain 
copies of the end product data schedule. The other commenter stated 
that the FOB price is irrelevant and unauditable and there is no 
accurate means to compare price information on the end product data 
schedule to actual price paid by the recipient agency. This same 
commenter said that the majority of recipient agencies arrange for 
purchases through a bid process, and that the competitive market will 
control the costs.
    Additionally, this commenter stated that it would be better to 
eliminate the FOB price entirely and satisfy the audit trail through: 
1) payment of a refund which reflects the contract value; 2) 
documentation that the distributor reduced the commercial price of the 
end product by the full contract value under the hybrid system; or 3) 
that the normal commercial price has been discounted by the full 
contract value for sales made under the direct discount system. Another 
commenter stated that only value pass-through information should be 
included on the end product data schedule and that full pricing 
information, such as delivered price, should be included as a separate 
attachment to the agreement. Three commenters supported the current 
requirement and indicated that delivery costs should also be identified 
on the end product data schedule. Two commenters recommended that FOB 
price and fee-for-service definitions should be clarified so that they 
are compatible.
    FCS is aware that pricing information supplied by processors often 
represents prices other than the FOB price. Many processors use 
delivered price to a State warehouse, highest price that can be charged 
to a recipient agency, delivered price to a recipient agency, etc. 
Based on this and the comments received, the Department believes that 
the requirement that FOB price be included as part of the State and NCP 
processing contracts should be eliminated. However, because the 
Department realizes that pricing information is very important to 
recipient agencies, the Department also believes that processors should 
provide any pricing information requested by the contracting agency, 
along with a thorough explanation of what this information represents.
    Regarding the proposal to place price and yield data on separate 
pages, four commenters were in favor of this idea and seven were 
opposed. Those in favor stated that a two-part system could result in 
reduced paperwork and that processors would not be required to submit 
new yield schedules for contract renewal or pricing changes. Another 
commenter stated that if preparing a separate sheet for yields will 
lead to a uniform commodity yield allowances and these are clearly 
related to end product, then the proposed changes may be desirable. 
That commenter further stated that the yield data should be cross-
referenced on the end product data schedule. Those commenters opposed 
to the proposed requirement stated that placing price and yield data on 
separate pages doubles the paperwork required, not reduces it. Several 
commenters stated that most processors have end product data schedules 
computerized, so it would be easier and more efficient to create 
revised yield and pricing information on a single sheet. One commenter 
stated that the specific reference to a two-part form should be removed 
from the regulations, but its removal would not prevent the use of a 
two-part form if this is preferred by the processor and the 
distributing agency. Another commenter opposed the proposal to have 
yield and pricing information on separate pages of the contract and 
preferred to have the gross and net pricing columns eliminated from the 
current end product data schedule and leave the rest of the end product 
data schedule as it currently exists.
    The Department proposed placing pricing and yield data on separate 
pages because it was thought that this would eliminate the need to 
update all end product data schedules when changes become necessary. 
However, the Department finds the arguments made by the commenters 
opposed to the proposal persuasive, in that placing the information on 
separate pages would increase the workload and paperwork for processors 
and distributing agencies. Additionally, with the increased use of 
computer technology, it would be easier to update the end product data 
schedule rather than requiring separate pages.
    This final rule adopts Sec. 250.30(c)(4)(ii) of the proposed State 
processing regulations and Sec. 252.4(c)(1) of the proposed NCP 
regulations without change, except that the proposal to require that 
price and yield data be placed on separate pages is not incorporated 
into Sec. 250.30(c)(4)(ii) of the final rule.

Liquidated Damages

    Section 250.30(c)(4)(iv)(B) of the current State processing 
regulations provides for termination of the processing contract when 
there has been noncompliance with its terms and conditions by the 
contracting agency or the processor. However, it has been the 
Department's experience that there have been circumstances where 
termination of processing contracts would seriously affect the ability 
of recipient agencies to purchase processed end products. Rather than 
terminating contracts for non-compliance with the contract provisions, 
the Department believes that there could be some middle ground 
established where instances of non- compliance could be better handled 
by means of assessing damages against the non-performing party of the 
contract under the State processing program. To accomplish this, the 
proposed rule requested comments from interested parties on ways to 
handle instances of program violations, short of contract termination. 
Commenters were requested to identify areas of non-compliance that have 
created the greatest problems in the past as well as the type and 
amounts of reasonable damages for non-compliance with specific 
provisions of the processing agreement to be applied against a 
processor. These liquidated damages were to be based on the severity 
and nature of the program violations identified, in order to ensure 
consistent application of the requirement. Additionally, comments were 
solicited regarding the incorporation of the liquidated damages 
provision of the NCP agreement into the NCP regulations.
    Twelve comments were received in response to this proposal. Ten 
commenters were opposed to the inclusion of a liquidated damages 
provision in the State processing and the NCP regulations. Many of 
these commenters stated that while the concept of establishing 
conditions of non-compliance in lieu of contract termination could be 
useful as an incentive for processors to adhere to contract 
requirements, addressing these conditions in Federal regulations is not 
appropriate. Rather than include such provisions in Federal 
regulations, six commenters stated that distributing agencies should be 
encouraged to identify liquidated damages assessments in a special 
provisions article of the processing agreement. Three commenters 
expressed concern that inclusion of a liquidated damages provision 
could deter processors from participating in the processing programs. 
Three commenters expressed concern that State laws are too varied and 
that such provisions may invoke unnecessary or excessive charges 
against processors, which could ultimately result in higher fees 
charged to recipient agencies. One commenter stated that most instances 
of non-compliance fall into the area of recordkeeping problems, such as 
failure to submit reports in a timely manner or to maintain production 
records. The commenter stated that the best way to handle such 
occurrences is for the distributing agency to work directly with the 
processor to resolve these problems rather than to impose fines. Two 
commenters stated that adding a liquidated damages provision to the NCP 
regulations would create undue hardship on a single processor with 
contracts in multiple states. Three commenters stated that there was no 
need for a liquidated damages provision because the bond was sufficient 
to cover the loss of any donated food. However, a different view point 
toward the bond coverage was expressed by two commenters who were in 
favor of including a liquidated damages provision. One of these 
commenters stated that since the bond only covers loss of inventory or 
loss of commodity, a liquidated damages provision would be appropriate 
if very carefully written so that good processors would not be deterred 
from program participation and that such a provision could not be 
punitive in nature. The other commenter in favor of a liquidated 
damages provision stated that while performance bonds do provide some 
relief, they do not adequately compensate the State or the recipient 
agencies for the additional administrative work which can result when a 
processor violates the provisions of the processing regulations and 
agreement provisions. This commenter stated that a well-constructed 
liquidated damages provision may enable the distributing agency to 
collect penalties which could be used to offset the administrative work 
that is generated by such violations.
    While the Department recognizes the need to have a means of 
addressing non-compliance with program and contract provisions, other 
than contract termination, the majority of the commenters' 
recommendations stated that it would be inappropriate for the 
Department to develop a liquidated damages provision that would be 
applicable to all distributing agencies nationwide. Based on these 
comments, the Department believes that handling such instances of non-
compliance is best left to the discretion of the distributing agencies. 
Therefore, this rule does not require that a liquidated damages 
provision be included in the State processing contract. However, as a 
means of ensuring compliance with all requirements of the processing 
contract short of contract termination, the Department strongly 
encourages the inclusion of a liquidated damages provision or other 
similar provision in the processing contract. As discussed in the 
preamble to the proposed State processing regulations, there are 
circumstances in which termination of processing contracts would 
seriously affect the ability of recipient agencies to purchase 
processed end products, and thus, termination is not always a practical 
option for less significant contract noncompliance. It has been the 
Department's experience in NCP that a liquidated damages provision has 
been a useful method of ensuring full compliance with the terms of the 
contract. The Department will continue to appraise the use and 
effectiveness of liquidated damage provisions or other intermediate 
alternatives to contract termination by distributing agencies and will 
address this issue in the future if warranted.
    Since FCS serves as the distributing agency in the NCP Program, and 
because this provision has been successfully applied in the past to 
address instances of non-compliance, the liquidated damages article 
that is currently part of the NCP agreement will remain unchanged. The 
Department plans to raise this issue with the distributing agencies 
participating in the State processing program to determine whether it 
is appropriate to incorporate a similar provision in State processing 
contracts.

Alternate Value Pass-Through Systems

    Section 250.30(d)(1)(iii) of the proposed State processing 
regulations and section 252.4(c)(4)(iii) of the proposed NCP 
regulations would permit FCS to take the paperwork and resource burden 
associated with using the alternate value pass-through systems into 
consideration when determining whether an alternate system should be 
approved. The proposed rule would also reserve to FCS the right to deny 
approval of systems which are labor- intensive and provide no greater 
accountability than systems specifically described for use by the 
current regulations.
    A total of twelve comments was received on this proposal, with ten 
commenters being in favor of the provision, one commenter being 
opposed, and one commenter possibly misunderstanding the proposed 
provision. Six of the ten commenters supported the provision exactly as 
proposed, while the remaining four made additional suggestions for 
inclusion in the provision. The additional suggestions were as follows: 
1) the Department must develop specific objective guidelines to follow 
when reviewing alternate value pass-through systems to ensure that all 
systems are evaluated under the same criteria; 2) the Department must 
consider the burden an alternate system would place on smaller 
processors, since they would probably have to use that system in a 
State where it had been approved; and 3) any alternate value pass-
through system should be piloted for one year before receiving full 
approval and reviewed every year thereafter to ensure that it is an 
accountable and efficient system. The Department believes that one 
commenter may have misunderstood the provisions, since concern was 
expressed that the Department was proposing to eliminate the option of 
allowing alternate value pass-through systems. Finally, the one 
commenter who was opposed to the provision stated that there was no 
need for this proposal, since the Department already has the authority 
to approve or deny alternative value pass-through systems.
    The Department supports the continued use of alternate value pass-
through systems with FCS approval under the State processing and NCP 
Programs. The Department also supports the proposal that the paperwork 
and resource burden associated with an alternate value pass-through 
system are extremely important factors that must be taken into 
consideration when determining whether an alternate system should be 
approved. The Department believes that distributing agencies, recipient 
agencies, and processors do not have the time or resources to dedicate 
to alternate systems that are more labor-intensive and provide no 
greater accountability than systems currently described for use by the 
regulations.
    Furthermore, since there has been little interest expressed by 
distributing agencies in using alternate value pass-through systems, 
the Department does not believe it would be practical to develop 
specific guidelines for use in evaluating such systems. Historically, 
there have only been three requests to use alternate systems. While two 
of these systems were approved for use in the State processing program, 
only one is currently in use. Instead, the Department finds that it is 
more effective to evaluate all requests to use alternate system value 
pass-through systems on a case-by-case basis, making sure that, at a 
minimum, the alternate system under consideration complies with the 
verification requirements contained in section 250.19(b)(2) of the Food 
Distribution Program regulations.
    This final rule adopts section 250.30(d)(1)(iii) of the proposed 
State processing regulations and section 252.4(c)(4)(iii) of the NCP 
regulations without change.

Invoice Information

    The proposed rule would eliminate the requirement under sections 
250.30(d)(2) and 250.30(e)(2) of the State processing regulations and 
section 252.4(c)(4) of the NCP regulations that processor/distributor 
invoices must indicate the amount of the discount included or refund 
due the recipient agencies for the end products purchased, regardless 
of the type of value pass-through system used. Sections 250.30.(d)(3) 
and 250.30(e)(2) of the proposed rule would also require processors to 
provide pricing information summaries to contracting agencies. 
Contracting agencies would be required to provide these pricing 
information summaries to recipient agencies as soon as possible after 
contract approval by the distributing agency. If any pricing 
information changed during the contract year, processors would be 
required to provide updated pricing information summaries to the 
contracting agencies 30 days prior to the effective date. The 
contracting agencies, in turn, would be required to provide the updated 
summaries to the recipient agencies. Section 250.30(c)(4)(xvii) of the 
proposed State processing regulations would create the affirmative duty 
of the processor to provide these pricing summaries and updated pricing 
summaries. Under the NCP program, section 252.4(c)(4) of the proposed 
rule would require processors to provide pricing information summaries 
directly to the recipient agencies as soon as possible after FCS 
contract approval. Also, section 252.4(c)(4) of the proposed rule would 
require that if any pricing information changes during the contract 
year, the processor must provide updated pricing information summaries 
to FCS and the recipient agencies 30 days prior to the effective date 
of such change.
    Eight commenters were in favor of eliminating the requirement that 
the processor ensure that invoices clearly show the discount included 
or refund due to the recipient agencies for the end product purchased. 
Commenters provided two main reasons for wishing to eliminate this 
requirement: 1) it has proved very difficult to require distributors to 
identify refunds due or discounts given on the invoices and 2) the 
requirement had become somewhat obsolete because FCS policy currently 
allows processors/distributors to provide pricing summaries to 
recipient agencies in lieu of providing the pricing information on 
invoices. Five commenters were opposed to the proposal and indicated 
that they wanted to retain the pricing information on the invoices 
because the invoice is the best place to alert recipient agencies that 
a refund is due or a discount has been given. One commenter added that 
many processors who utilize the refund system provide a pre-printed 
rebate application which lists the commodity value for each end 
product. Two commenters indicated that the proposed rule would have 
little, if any, effect on their operations. Only one comment was 
received on the changes proposed for the NCP Program. That commenter 
endorsed the proposed provisions in section 252.4(c)(4).
    In the past, several processors and distributors have expressed 
concern to FCS about the added cost of redesigning and reprinting 
invoices in order to accommodate the requirement in the current 
regulations that the processor/distributor invoices clearly indicate 
the discount included or the refund due on end products. In response to 
the growing concern, on May 2, 1989, FCS issued a policy memorandum 
which allowed processors or distributors to provide recipient agencies 
a fact sheet, which clearly identified that the processed end products 
are made from commodities and indicates the amount of refund or 
discount due eligible recipient agencies for such purchases. The 
Department believes it is appropriate to incorporate this existing 
policy into the final rule. These pricing information summaries need 
only consist of information such as the product code, gross price, 
refund due or discount given and net price. These summaries, as well as 
any updates to the summaries, must be prepared by processors and 
furnished to recipient agencies by either the processor or the 
distributing agency.
    Based on the above, this final rule adopts sections 
250.30(c)(4)(xvii), 250.30(d)(3) and 250.30(e)(2)of the proposed State 
processing regulations and section 252.4(c)(4) of the proposed NCP 
regulations without change.

Substitution of Donated Food

    Section 250.30(f)(1)(i), of the proposed rule would allow the 
substitution of commercial food for those donated foods specifically 
listed as substitutable in the current regulations without requesting 
prior approval from the distributing agency. Additionally, sections 
250.30(f)(1)(iii), 250.30(f)(2), and 250.30(f)(4) of the proposed State 
processing regulations include the following provisions: 1) Processors 
may continue to request approval from FCS to substitute other 
commercial foods (except meat and poultry), although without the 
requirement that requests may be made only when the distributing 
agency's inability to maintain the necessary inventory of donated food 
at the processing plant would disrupt the production of end products 
and in all cases in which a State processing contract permits 
substitution, provided that processors must provide documentation 
sufficient to substantiate that they continue to acquire sufficient 
substitutable commercial foods necessary to meet the 100 percent yield 
requirement; 2) Distributing agencies can withhold deliveries of 
donated food from processors which have reduced their level of 
commercial production because of participation in the State processing 
program; and 3) Authorization to substitute commercial foods for 
donated foods not specifically listed applies only for the duration of 
all contracts currently entered into by the processor. Sections 
252.3(c) and 252.4(c)(7) of the proposed rule would similarly amend the 
NCP regulations.
    The Department received sixteen comments on this proposal. All 
commenters concurred that processors should not need written approval 
from the distributing agency to substitute those donated foods listed 
as substitutable in the regulations with commercial foods. However, two 
commenters stated that the Department should consider making all 
donated foods substitutable and one commenter stated that all donated 
food, except for meat and poultry, should be considered as 
substitutable. Those commenters who favored a total or almost total 
substitution of all donated foods provided conditions under which 
substitution should be permitted: 1) USDA's Food Safety Inspection 
Service inspectors and/or USDA's Agricultural Marketing Service graders 
verify that the commercial food being substituted is of equal or better 
quality and is of the same generic identity as the donated food; 2) the 
processor must provide the specifications of the commercial food used 
to substitute for donated food, along with a certification that the 
substituted foods are of equal or better quality; and 3) the processor 
must report all substitution on the monthly performance report to the 
distributing agency.
    Three comments were received in response to the proposal which 
would permit distributing agencies to withhold deliveries of donated 
food from processors who have reduced their level of commercial 
production because of participation in the State processing program. 
These commenters made it clear that they believe distributing agencies 
do not have access to a processor's records on the production of 
commercial end products in order to determine whether withholding 
donated food is appropriate. One processor expressed concern that the 
documentation necessary to substantiate that the processor acquires 
sufficient amounts of substitutable donated food would increase the 
overall workload of the distributing agency staff.
    The Department supports the commenters who recommended that all 
donated foods currently listed in the regulations be considered as 
substitutable with commercial foods without prior approval from the 
distributing agency. However, the Department does not agree that all 
donated foods should be considered as substitutable. The Department 
purchases high quality products which must meet strict specifications 
for recipient agencies to use in their meal service operations. Because 
the quality of the non-listed donated foods, especially meat and 
poultry, can vary tremendously, which will ultimately affect the 
quality of the end product, the Department believes it is necessary to 
eliminate any possibility that inferior commercial product could be 
substituted for the high quality donated foods provided by USDA. 
Additionally, the argument that Federal inspectors or graders could 
ensure the quality of any commercial product being substituted for 
donated food is not reasonable. Federal inspectors or graders are only 
present in processing plants that convert donated meat or poultry into 
finished end products; they are not required to be on-site in bakeries 
or processing plants which only handle fruits, vegetables and/or 
grains. The additional costs for obtaining the services of inspectors 
or graders to perform these services would be extremely high. 
Additionally, based on the comments received, it is apparent that 
commenters do not favor requiring distributing agencies to monitor the 
level of the processors's commercial production so they would be 
permitted to withhold deliveries of donated food from processors which 
have reduced their level of commercial production because of 
participation in the State processing program.
    This final rule adopts sections 250.30(f)(1)(i) and 250.30(f)(4) of 
the proposed State processing regulations without change. To alleviate 
the commenters' concerns, but to maintain the necessary program 
accountability, section 250.30(f)(1)(iii) of this final rule will 
require the processor to be responsible for maintaining documentation 
that normal commercial production has not been reduced as the result of 
participation in the processing program. To conform to the change in 
section 250.30(f)(1)(iii), this final rule also adds a new paragraph to 
section 250.30(c)(4)(xviii) of this final rule. This final rule adopts 
section 250.30(f)(2) of the proposed State processing regulations as 
proposed with a minor modification for clarification. Additionally, 
this final rule adopts sections 252.3(c) and 252.4(c)(7) of the 
proposed NCP regulations without change.

Time Frames for Processors to Pay Refunds

    Section 250.30(k)(3) of the proposed State processing regulations 
would require processors to make refund payments to recipient agencies 
within 30 days after receipt of any refund application. Additionally, 
sections 250.30(k)(1) and 252.4(c)(4)(i)(B) of the proposed rule would 
also permit recipient agencies to file refund applications on a Federal 
fiscal quarterly basis, if the total anticipated refund due for all 
purchases from that processor during the quarter is 25 dollars or less. 
Furthermore, processors would be permitted to group together refund 
applications for a single recipient agency on a Federal fiscal basis if 
the total anticipated refund due that recipient agency during the 
quarter is 25 dollars or less. These quarterly options of batching of 
refund applications and refund payments would only be permitted between 
a recipient agency and a processor, not between a distributor and a 
processor.
    A total of 16 comments was received on this proposal. Regarding the 
30-day time frame for processors to pay refunds, twelve commenters 
stated that they agreed with this concept and three commenters were 
opposed. Many of those commenters that supported the 30-day time frame 
did so for the following reasons: 1) a 30-day time frame is more 
realistic and logical than the 10-day time frame; 2) a 30-day time 
frame conforms to time frames used in normal business practices; 3) a 
10-day time frame is very difficult to meet because of limited staff 
resources; and 4) a 30-day time frame is reasonable because a refund 
payment will usually be received by the recipient agency before the 
recipient agency's payment for the end products reaches the processor. 
The three commenters who expressed opposition to the 30-day time frame 
stated that it allows the processor to use school food authority money 
for an excessive period of time. One processor also stated that the 
current 10-day time frame is more appropriate because it is the key to 
acceptance of the refund system by recipient agencies.
    Fourteen comments were received regarding quarterly batching of 
refund applications by recipient agencies and twelve comments were 
received on quarterly batching of refund payments by processors. While 
all comments received on the concept of quarterly batching were 
favorable, three commenters made the following suggestions: 1) the 
threshold should be increased from 25 dollars to 100 dollars; 2) there 
should be no minimum dollar threshold associated with quarterly 
submission of refund applications by recipient agencies; 3) recipient 
agencies should have an option to file refund applications monthly or 
quarterly and processors must provide refunds within 30 days of receipt 
of the refund application; and 4) to accommodate extenuating 
circumstances, distributing agencies should permit recipient agencies 
to submit refund applications and processors to provide refund payments 
outside of the quarterly time frames.
    Based on the comments received and the reasons set forth above, 
this final rule adopts sections 250.30(k)(1) and 250.30(k)(3) of the 
proposed State processing and section 252.4(c)(4)(i)(B) of the proposed 
NCP regulations without change.

Refund Applications/Performance Reports

    Section 250.30(k)(1) of the proposed State processing regulations 
would eliminate the requirement that recipient agencies must forward 
copies of the refund applications to distributing agencies at the same 
time they submit the refund applications to the processor. Section 
250.30(m)(1) of the proposed rule would also amend the State processing 
regulations to add the following requirements: 1) that monthly 
performance reports be postmarked no later than the final day of the 
month following the reporting period and the final performance report 
for the contract period be postmarked no later than 60 days from the 
close of the contract year; and 2) that performance reports must be 
submitted monthly unless a processor made no sales and had no inventory 
during that month. Finally, section 250.17 of the proposed State 
processing regulations would provide that where performance reports are 
electronically transmitted to the distributing agency by means of a 
facsimile machine, the date printed by the facsimile machine on the 
facsimile copy may serve as the postmark. The Department received 
seventeen comments on this section of the proposed rule.
    Ten comments were received on eliminating the requirement that 
recipient agencies submit copies of the refund applications to the 
distributing agencies. All commenters were in favor of the proposal, 
stating that the elimination of this dual reporting requirement would 
reduce the paperwork burden. Since section 250.30(k)(3) of the current 
State processing regulations also requires processors to send copies of 
the refund applications and refund payments to the distributing agency 
as part of the monthly performance report, the requirement for 
recipient agencies to also send the refund applications to the 
distributing agencies was viewed as duplicative.
    Ten comments were received regarding the use of the postmark date 
to track the timing for submission of the monthly performance reports. 
Nine commenters were in favor of the proposed change and one opposed. 
Those in favor stated that by placing this requirement in the 
regulations, any uncertainties about the required time frames for 
submission of the performance reports would be clarified. The one 
commenter opposed to this provision stated that upon receipt, each 
performance report is stamp-dated when received and that the envelope 
containing the postmark is discarded, because it is not practical to 
keep mailing envelopes on file. The Department wishes to clarify that 
the intent of this requirement was not for distributing agencies to 
maintain mailing envelopes. Rather, distributing agencies should record 
the postmark date that is on the mailing envelope and determine whether 
the performance report has been submitted within the required time 
frame. All comments received on the proposal that the date printed on a 
report transmitted by facsimile machine may serve as the postmark date 
were favorable; however, one commenter questioned whether it is 
necessary to include such a policy in regulations. The Department 
believes that it is important to state within the regulations that the 
date printed by the facsimile machine may serve as the postmark date, 
since this method of submitting performance reports is becoming more 
commonplace.
    Commenters were generally opposed to the proposed requirement that 
processors would not have to submit performance reports for those 
months in which no sales were made and where processors had no 
inventory. Fifteen comments were received on this provision. Four 
commenters were in complete agreement, one commenter was in favor but 
with restrictions, and ten commenters opposed. Those in complete 
agreement with the proposal did not provide further explanation for 
their support. However, the one commenter in partial agreement with the 
proposal recommended that the requirement be eliminated when processors 
have no inventory and no sales activity, but stipulated that upon 
arrival of any inventory or initiation of any approved sales from that 
period on, monthly performance reports be required. Those commenters 
who wished to require monthly performance reports for each month the 
processing contract is in effect provided the following reasons: (1) 
Distributing agencies often do not know if a processor has inventory or 
has made any sales during the month until the monthly report is 
received; (2) it would be difficult to know if a report was required, 
if a report was submitted but lost in the mail, if the processor forgot 
to submit the report, or if the processor purposely did not send the 
report; (3) distributing agencies may not know the status of a 
processor's inventory because incoming direct shipments of donated food 
may not arrive when anticipated or product can be backhauled without 
the distributing agency's knowledge; (4) monthly reports must be 
maintained to establish an audit trail; (5) auditable records should 
run consecutively without breaks in months; and (6) if the Department 
eliminates the annual reconciliation report, distributing agencies, FCS 
and auditors must have the monthly performance reports for each month 
the processing agreement is in effect in order to verify all activities 
that occurred during the agreement period. One commenter added that 
processors should always have sales activity each month because the 
current processing regulations discourage processors from entering into 
agreements if their activity will be limited. The Department finds the 
commenters' arguments persuasive that monthly performance reports be 
required for each month that the processing agreement is in effect.
    Based on the comments received and the above reasons, this final 
rule adopts sections 250.17(f), 250.30(k)(1) and 250.30(m)(1) of the 
proposed State processing regulations without change, except that the 
proposal in section 250.30(m)(1) that processors would not be required 
to submit performance reports for those months in which no sales were 
made and where processors had no inventory is not included in this 
final rule.

List of Contracting Agencies

    As part of the performance report requirements under section 
250.30(m) of the current State processing regulations, processors are 
required to submit to the distributing agency a list of all contracting 
agencies and their locations with which the processor has processing 
contracts. Because the Department believes that requiring this list 
every month is unnecessary and duplicative, the proposed rule would 
eliminate this list.
    Additionally, in order to ensure that sales are only made to 
eligible recipient agencies with approved processing contracts, 
Sec. 250.30(c)(4)(xv) of the current regulations requires that as part 
of the processing contract, the contracting agency must provide the 
processor with a list of all recipient agencies eligible to purchase 
end products under the contract. However, the current rule implies, but 
does not explicitly require, the contracting agency to provide updates 
to the list of recipient agencies for any changes that occur during the 
contract period. Therefore, to clarify the regulation, 
Sec. 250.30(c)(4)(xv) of the proposed rule would require the 
contracting agency to provide updates to the list of recipient agencies 
for any changes which occur during the contract period.
    Sixteen comments were received on these two proposals, all in favor 
of the provisions as proposed. Accordingly, this final rule adopts 
Secs. 250.30(c)(4)(xv) and 250.30(m) of the proposed State processing 
regulations without change.

Quarterly Processing Activity Reports and Annual Reconciliation Reports

    The proposed rule provided for major revisions in the areas of 
quarterly inventory reports, the annual reconciliation report and the 
monthly performance reports. Sections 250.30(m)(1), 250.30(n) (3) and 
(4), and 250.30(o)(1) proposed to amend the State processing 
regulations as follows: 1) the quarterly inventory reports and the 
annual reconciliation report would be replaced with the monthly 
performance reports with year-to-date totals; 2) distributing agencies 
would be required to forward to the FCS Regional Office the monthly 
performance report with year-to-date totals provided by the processor 
for the last month of each Federal fiscal quarter; 3) when forwarding 
these monthly performance reports, they would be required to be 
postmarked no later than 60 days following the close of each Federal 
fiscal quarter, except that such reports must be postmarked no later 
than 90 days following the close of the contract period; 4) when a 
processor submitted no monthly performance report for the last month of 
a Federal fiscal quarter, distributing agencies would be required to 
submit to the FCS Regional Office the last monthly performance report 
received from the processor for that Federal fiscal quarter; 5) the 
last monthly performance report for the contract period would serve as 
the annual reconciliation report; 6) distributing agencies would be 
required to certify the accuracy of the information contained in the 
final performance report; and 7) when a processor submitted no monthly 
performance report for the last month of the contract period, the last 
monthly performance report received from the processor would serve as 
the annual reconciliation report and this final performance report 
would be required to be postmarked no later than 90 days following the 
close of the contract period.
    Seventeen comments were received on the above provisions contained 
in the proposed rule. Regarding the replacement of the quarterly 
inventory reports with the monthly performance reports, seven comments 
were received, four in favor and three opposed. However, based on 
comments received, it appears that some commenters may have 
misunderstood the purpose for replacing the quarterly inventory reports 
with the monthly performance reports with year-to-date totals. Under 
the current regulations, performance reports are required to contain 
inventory information on a monthly basis, but not on a quarterly basis. 
Distributing agencies are required to extract inventory information 
from the performance reports and compile this information on a 
quarterly basis for submission to the FCS Regional Office. Requiring 
that performance reports have year-to-date totals of inventory 
information would eliminate the need for distributing agency staff to 
prepare a quarterly inventory report. This reduces the workload of the 
distributing agency staff and only requires a small change in the 
processor's performance report format.
    Furthermore, it was not the intent of the Department that 
distributing agencies photocopy the entire content of the performance 
report for submission to the FCS Regional Office. While sales activity 
for the month usually comprises the major part of the performance 
report, processors typically show inventory activity on a separate page 
of the monthly performance report. On the inventory summary portion of 
the performance report, all sales are represented by a single inventory 
drawdown figure which represents the cumulative total of all individual 
sales reported for the month. The intent of the proposed rule was for 
distributing agencies to send the inventory summary portion of the 
December, March and June performance reports that contains the 
inventory information (i.e., beginning inventory, receipts for the 
month, transfers in and out, inventory drawdown, and ending inventory 
balance with year-to-date totals) to the FCS Regional Offices, and not 
the entire performance report.
    Twelve commenters were in favor of replacing the annual 
reconciliation report with the last monthly performance report with 
year-to-date totals, and two commenters were opposed. Those in favor 
stated that this proposal is a positive step toward reducing paperwork, 
while those opposed stated it would increase paperwork because 
distributing agencies would be required to certify the accuracy of the 
performance reports. In its review of this proposal and the comments 
received, the Department believes this proposal will serve to reduce 
paperwork. Under the current regulations for annual reconciliation, 
processors must total donated food receipts, transfer information, 
sales activity, and ending inventory balance from the individual 
performance reports. Under the proposed rule, it would not be necessary 
for processors to go through previous performance reports and compute 
these figures, since this information will be tallied cumulatively each 
month. Additionally, submitting performance reports with year-to-date 
totals will eliminate the need for distributing agencies to compile 
data from the individual quarterly reports to ensure that the annual 
reconciliation report figures are accurate. The final performance 
report for the contract year, including a summary sheet of year-to-date 
inventory totals, will replace the annual reconciliation report 
formerly required in the final rule.
    One commenter expressed concern that the time frames for submitting 
the performance reports with year-to-date totals to FCS are the same 
time frames currently required for submission of the quarterly 
inventory reports. That commenter indicated that if there were errors 
in the report, there would not be sufficient time for the processor to 
make the corrections and return the report to the distributing agency 
in order for the distributing agency to submit it to the FCS Regional 
Office on time. The Department believes that since most performance 
reports are computer-generated, and the calculation of the year-to-date 
totals would be performed by a formula placed into the computer 
program, there would be very few errors made. Furthermore, the 
Department believes that it is better to handle any errors that might 
be discovered on performance reports on a case-by-case basis. 
Distributing agencies will be required to certify that the inventory 
information contained in the final performance report is accurate, just 
as they are required to do under section 250.30(n)(4) of the current 
rule for the annual reconciliation report. The time frames for 
submission of the performance reports, as discussed earlier in this 
preamble, will remain the same as in the proposed rule and are clearly 
spelled out in the final rule under section 250.30(m)(1).
    As discussed earlier in this preamble under Refund Applications/
Performance Reports, section 250.30(m)(1) of the proposed rule stated 
that processors are not required to submit performance reports for 
those months in which no sales were made and those months where 
processors had no inventory. As previously discussed, this provision is 
not included in the final rule. Therefore, the provisions in sections 
250.30(n)(3) and 250.30(o)(1) of the proposed State processing 
regulation, which would provide that when a processor does not submit a 
monthly performance or inventory report for the last month of a Federal 
fiscal quarter, the distributing agency must forward to the FCS 
Regional Office the last monthly performance report received from the 
processor for that quarter, are not included in this final rule.
    This final rule adopts sections 250.30(m)(1), 250.30(n) (3) and 
(4), and 250.30(o)(1) of the proposed State processing regulations 
without change, except as previously noted. FCS plans to develop a 
prototype performance report format which will be easily adaptable for 
processors to incorporate into existing inventory reporting programs.
    This section of the proposed rule did not affect the NCP Program.

List of Subjects in 7 CFR Parts 250 and 252

    Aged, Agricultural commodities, Business and industry, Food 
assistance programs, Food donations, Food processing, Grant programs-
social programs, Indians, Infants and children, Price support programs, 
Reporting and recordkeeping requirements, School breakfast and lunch 
programs, Surplus agricultural commodities.
    For reasons set forth in the preamble, 7 CFR Parts 250 and 252 are 
amended as follows:

PART 250--DONATION OF FOODS FOR USE IN THE UNITED STATES, ITS 
TERRITORIES AND POSSESSIONS AND AREAS UNDER ITS JURISDICTION

    1. The authority citation for Part 250 continues to read as 
follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 612c, 612c note, 1431, 1431b, 
1431e, 1431 note, 1446a-1, 1859; 15 U.S.C. 713c; 22 U.S.C. 1922; 42 
U.S.C. 1751, 1755, 1758, 1760, 1762a, 1766, 3030a, 5179, 5180.

    2. In Sec. 250.3:
    a. The definition of Fee-for-service is added in alphabetical 
order;
    b. The definition of Processing fee is removed; and
    c. The definition of Processor is revised.
    The addition and revision read as follows:


Sec. 250.3  Definitions.

* * * * *
    Fee-for-service means the price by pound or by case representing a 
processor's cost of ingredients (other than donated foods), labor, 
packaging, overhead, and other costs incurred in the conversion of the 
donated food into the specified end product.
* * * * *
    Processor means any commercial facility which processes or 
repackages donated foods. However, commercial enterprises which handle, 
prepare and/or serve products or meals containing donated foods on-site 
solely for the individual recipient agency under contract are exempt 
under this definition. Notwithstanding this definition, a recipient 
agency which prepares products or meals containing donated foods for 
more than one recipient agency under more than one contract in the same 
facility or prepares products or meals for any one recipient agency 
off-site shall not be a processor if the recipient agency preparing 
products or meals provides: (1) accountability for any donated foods 
received from another recipient agency consistent with Sec. 250.16 of 
this part and (2) any funds received as payment for preparing products 
or meals shall be deposited in the non-profit meal account of the 
recipient agency preparing products or meals.
* * * * *
    3. In Sec. 250.17, a new paragraph (f) is added to read as follows:


Sec. 250.17  Reports.

* * * * *
    (f) Report transmission. Where a report is to be postmarked by a 
specific date and such report is transmitted by means of a facsimile 
machine, the date printed by the facsimile machine on the facsimile 
copy may serve as the postmark.
    4. In Sec. 250.30:
    a. The last sentence of paragraph (a) is removed;
    b. Paragraph (b)(2)(ii) is revised;
    c. Two sentences are added between the second and third sentences 
of the introductory text of paragraph (c)(1), and the paragraph 
incorrectly designated as (c)(1)(l) is redesignated as paragraph 
(c)(1)(i);
    d. The first sentence of paragraph (c)(4)(ii) is revised;
    e. Paragraph (c)(4)(iii) is revised;
    f. Paragraph (c)(4)(vii) is revised;
    g. The words ``and identify'' are added to the end of the 
introductory text of paragraph (c)(4)(viii)(D);
    h. Paragraph (c)(4)(xiii) is revised;
    i. Paragraph (c)(4)(xv) is amended by adding the words ``and 
provide updates for any changes which occur during the contract 
period'' at the end of the paragraph;
    j. Paragraph (c)(5) is redesignated as paragraph (c)(4)(xvi) and is 
further amended by adding the words ``A provision that'' at the 
beginning of the paragraph;
    k. A new paragraph (c)(4)(xvii) is added;
    l. A new paragraph (c)(4)(xviii) is added;
    m. Paragraph (d) is revised;
    n. Paragraph (e) is revised;
    o. Paragraphs (f)(1)(i) and (f)(1)(iii) are revised;
    p. A new sentence is added after the first sentence in paragraph 
(f)(2);
    q. Paragraph (f)(4) is revised;
    r. Paragraphs (k)(1) and (k)(3) are revised;
    s. Paragraph (k)(4) is removed;
    t. The first sentence of paragraph (l) is amended by adding the 
words ``or renewed'' after the word ``into'';
    u. The introductory text of paragraph (m)(1) is revised;
    v. Paragraph (m)(1)(vii) is removed and reserved;
    w. The first sentence of paragraph (n)(3) is revised;
    x. Paragraph (n)(4) is revised;
    y. Paragraph (o)(1) is revised;
    z. The introductory text of paragraph (o)(2) is amended by removing 
the words ``reporting the information identified'' and adding the words 
``the reporting requirements'' in their place.
    The revisions and additions read as follows:


Sec. 250.30 State processing of donated foods.

* * * * *
    (b) Permissible contractual arrangements. * * *
    (2) * * *
    (ii) When selling end products through a distributor, such sales 
shall be in accordance with paragraph (e) of this section.
* * * * *
    (c) Requirements for processing contracts. (1) * * * However, 
processing contracts may give contracting agencies the option of 
extending contracts for two 1-year periods, provided that any changed 
information must be updated before any contract extension is granted, 
including the information in paragraphs (c)(3), (c)(4)(ii), and 
(c)(4)(viii)(B) of this section. The processor must have performed to 
the satisfaction of the contracting agency during the previous contract 
year, submitted all required reports and any corrections to such 
reports up to the time that contract extension occurs, and submitted 
its certified public accountant report as required under paragraph 
(c)(4)(xi) of this section before the contract may be extended. * * *
* * * * *
    (4) * * *
    (ii) A description of each end product, the quantity of each 
donated food and the identification of any other ingredient which is 
needed to yield a specific number of units of each end product (except 
that the contracting agency may permit the processor to specify the 
total quantity of any flavorings or seasonings which may be used 
without identifying the ingredients which are, or may be, components of 
flavorings or seasonings), the total weight of all ingredients in the 
batch formula, the yield factor for each donated food, and any pricing 
information provided by the processor in addition to that required in 
paragraph (c)(4)(iii) of this section as requested by the contracting 
agency and a thorough explanation of what this additional pricing 
information represents. * * *
    (iii) The contract value of each donated food to be processed and, 
where processing is to be performed only on a fee-for-service basis as 
defined in Sec. 250.3, the fee-for-service;
* * * * *
    (vii) A provision that end products containing donated foods that 
are not substitutable under paragraph (f) of this section shall be 
delivered only to eligible recipient agencies and that end products 
containing both substitutable and non-substitutable donated foods may 
be delivered and sold in accordance with the requirements of paragraph 
(d) and (e) of this section;
* * * * *
    (xiii) A provision that the fee-for-service or value pass-through 
system to be used for the sale of end products to recipient agencies 
shall be described and be consistent with paragraphs (d) and (e) of 
this section.
* * * * *
    (xvii) A provision that the processor shall provide pricing 
information summaries and updated pricing information summaries as 
required in paragraphs (d)(3) and (e)(2) of this section.
    (xviii) A provision that the processor shall maintain documentation 
which demonstrates that the level of the processor's commercial 
production has not been reduced, as required in paragraph (f)(1)(iii) 
of this section.
    (d) End products sold by processors. (1) When recipient agencies 
pay the processor for end products, such sales shall be under:
    (i) A refund system as defined in Sec. 250.3 and in accordance with 
paragraph (k) of this section; or
    (ii) A discount system which provides the price of each unit of end 
product purchased by eligible recipient agencies to be discounted by 
the stated contract value of the donated foods contained therein; or
    (iii) An alternative value pass-through system under which the 
value of the donated food contained in each unit of end product shall 
be passed to the recipient agency and which has been approved by FCS at 
the request of the distributing agency. Any alternative value pass-
through system approved under this paragraph must comply with the sales 
verification requirements specified in Sec. 250.19(b) of this part, or 
an alternative verification system approved by FCS. The Department 
retains the authority to inspect and review all pertinent records 
including records pertaining to the verification of a statistically 
valid sample of sales. FCS may consider the paperwork and resource 
burden associated with alternative value pass-through systems when 
considering approval and reserves the right to deny the approval of 
systems which are labor-intensive and provide no greater accountability 
than those systems permitted under paragraphs (d) and (e) of this 
section.
    (2) When a processor delivers end products produced under a fee-
for-service contract, the processor shall separately identify on the 
bill for the recipient agency the agreed-upon fee-for-service and any 
delivery costs.
    (3) Processors shall provide pricing information summaries to 
contracting agencies and contracting agencies shall provide this 
information to recipient agencies as soon as possible after contract 
approval. If this pricing information changes during the contract 
period, processors shall provide updated pricing information to the 
contracting agency 30 days prior to the effective date of the change, 
which, in turn, shall provide this updated information to eligible 
recipient agencies.
    (e) End products sold by distributors.
    (1) When a processor transfers end products to a distributor for 
delivery and sale to recipient agencies, such sales shall be under:
    (i) A refund system as defined in Sec. 250.3 and in accordance with 
paragraph (k) of this section; or
    (ii) A hybrid system which provides a refund for the contract value 
of the donated food shall be provided to the distributor in accordance 
with paragraph (k) of this section and the price of each unit of end 
product purchased by eligible recipient agencies through a distributor 
shall be discounted by the contract value of the donated foods 
contained therein; or
    (iii) An alternative value pass-through system under which the 
contract value of the donated food contained in each unit of end 
product shall be passed on to the recipient agency and which has been 
approved by FCS in accordance with paragraph (d)(1)(iii) of this 
section; or
    (iv) When a processor arranges for delivery of processed end 
products produced under fee-for-service contracts by distributors, the 
products shall be delivered and invoiced using one of the following 
procedures:
    (A) The recipient agency is billed by the processor for the fee-
for-service and the distributor bills the recipient agency for the 
storage and delivery of the end products; or
    (B) The processor arranges for the delivery of end products through 
a distributor on behalf of the recipient agency. In this system, the 
processor's invoice must include both the fee-for-service and the 
distributor's charges as separate, clearly identifiable charges.
    (2) Processors shall provide pricing information summaries to 
contracting agencies and contracting agencies shall provide this 
information to recipient agencies as soon as possible after contract 
approval. If this pricing information changes during the contract 
period, the processor shall provide updated pricing information to the 
contracting agency, which, in turn, shall provide this information to 
the eligible recipient agencies.
    (f) Substitution of donated foods with commercial foods.
    (1) * * *
    (i) Only butter, cheese, corn grits, cornmeal, flour, macaroni, 
nonfat dry milk, peanut butter, peanut granules, roasted peanuts, rice, 
rolled oats, rolled wheat, shortening, vegetable oil, and spaghetti may 
be substitutable as defined in Sec. 250.3 and such other food as FCS 
specifically approves as substitutable under paragraph (f)(4) of this 
section (substitution of meat and poultry items shall not be 
permitted),
* * * * *
    (iii) Processors shall maintain documentation that they have not 
reduced their level of commercial production because of participation 
in the State processing program.
    (2) * * * Where commercial food is authorized to be substituted for 
any donated food specifically listed in paragraph (f)(1)(i) of this 
section, the processor shall maintain records to substantiate that it 
continues to acquire on the commercial market sufficient purchases of 
substitutable food for commercial production and any amounts necessary 
to meet the 100 percent yield requirement. * * *
* * * * *
    (4) Processor may request approval to substitute commercial foods 
for donated foods not specifically listed in paragraph (f)(1)(i) of 
this section by submitting such request to FCS in writing and 
satisfying all requirements of paragraphs (f)(1)(ii) and (iii) of this 
section. FCS will notify the processor in writing of authorization to 
substitute commercial foods for donated foods not listed in paragraph 
(f)(1)(i) of this section and such authorization shall apply for the 
duration of all current contracts entered into by the processor 
pursuant to this section.
* * * * *
    (k) Refund payments. (1) When end products are sold to recipient 
agencies in accordance with the refund provisions of paragraph (d) or 
(e) of this section, each recipient agency shall submit refund 
applications to the processor within 30 days from the close of the 
month in which the sales were made, except that recipient agencies may 
submit refund applications to a single processor on a Federal fiscal 
quarterly basis if the total anticipated refund due for all purchases 
of product from that processor during the quarter is 25 dollars or 
less.
* * * * *
    (3) Not later than 30 days after receipt of the application by the 
processor, the processor shall make a payment to the recipient agency 
or distributor equal to the stated contract value of the donated foods 
contained in the purchased end products covered by the refund 
application, except that processors may group together refund 
applications for a single recipient agency on a Federal fiscal 
quarterly basis if the total anticipated refund due that recipient 
agency during the quarter is 25 dollars or less. Copies of requests for 
refunds and payments to recipient agencies and/or distributors shall be 
forwarded to the appropriate distributing agency by the processor.
* * * * *
    (m) Performance reports. (1) Processors shall be required to submit 
to distributing agencies monthly reports of performance under each 
processing contract with year-to-date totals. Processors contracting 
with agencies other than a distributing agency shall submit such 
reports to the distributing agency having authority over that 
particular contracting agency. Performance reports shall be postmarked 
no later than the final day of the month following the reporting 
period; however, the final performance report for the contract period 
shall be postmarked no later than 60 postmarked days from the close of 
the contract year. The report shall include:
* * * * *
    (n) Inventory controls. * * *
    (3) The last monthly performance report for the contract period, as 
required in paragraph (m)(1) of this section, shall serve as the annual 
reconciliation report. * * *
    (4) Distributing agencies shall certify the accuracy of the annual 
reconciliation report and forward it to the FCS Regional Office. Such 
report shall be postmarked no later than 90 days following the close of 
the contract year. All monies shall be used in accordance with FCS 
Instruction 410-1, Non-Audit Claims, Food Distribution Program.
* * * * *
    (o) Processing inventory reports. (1) Distributing agencies shall 
forward to the FCS Regional Office the inventory summary portion of the 
monthly performance report submitted by the processors in accordance 
with paragraph (m)(1) of this section for the last month of each 
Federal fiscal quarter. Such reports shall be postmarked no later than 
60 days following the close of each Federal fiscal quarter, except that 
such reports shall be postmarked no later than 90 days following the 
close of the contract year.
* * * * *

PART 252--NATIONAL COMMODITY PROCESSING PROGRAM

    1. The authority citation for Part 252 continues to read as 
follows:

    Authority: Sec. 416, Agricultural Act of 1949 (7 U.S.C. 1431).


Sec. 252.3  [Amended]

    2. In Sec. 252.3, the first sentence of paragraph (c) is amended by 
removing the words ``When FCS approves the substitution of donated 
commodities with commercial food or when the agreement permits such 
substitution'' and adding in their place the words ``When the processor 
substitutes commercial food for donated food in accordance with 
Sec. 252.4(c)(7) of this part.''
    3. In Sec. 252.4:
    a. A new sentence is added to the end of paragraph (b);
    b. The third sentence of paragraph (c)(1) is revised;
    c. The third sentence of the introductory text of paragraph (c)(4) 
is revised and a new sentence is added following the third sentence;
    d. Paragraph (c)(4)(i)(B) is revised;
    e. A sentence is added to the end of paragraph (c)(4) (iii);
    f. Paragraph (c)(7) is revised;
    g. Paragraphs (c)(14), (c)(15), (c)(16), and (c)(17) are 
redesignated as paragraphs (c)(15), (c)(16), (c)(17), and (c)(18), and 
a new paragraph (c)(14) is added.
    The revisions and additions read as follows:


Sec. 252.4  Application to participate and agreement.

* * * * *
    (b) Agreement between FCS and Participating Food Processors. * * * 
However, FCS may extend processing contracts for two 1-year periods, 
provided that any changed information must be updated before any 
contract extension is granted, including the information in paragraphs 
(c)(1) and (c)(5) of this section.
    (c) Processor requirements and responsibilities. * * *
    (1) * * * The end product data schedule shall provide pricing 
information supplied by the processor as requested by FCS and a 
thorough explanation of what this pricing information represents. * * *
* * * * *
    (4) * * * Regardless of the method used, processors shall provide 
pricing information summaries to recipient agencies as soon as possible 
after contract approval by FCS. If the pricing information changes 
during the contract period, processors shall provide updated pricing 
information to FCS and the recipient agencies 30 days prior to the 
effective date. * * *
    (i) * * *
    (B) Refund system. The processor shall invoice the recipient agency 
for the commercial/gross price of the end product. The recipient agency 
shall submit a refund application to the processor within 30 days of 
receipt of the processed end product, except that recipient agencies 
may submit refund applications to a single processor on a Federal 
fiscal quarterly basis if the total anticipated refund due for all 
purchases of end product from that processor during the quarter is 25 
dollars or less. The processor shall pay directly to the eligible 
recipient agency within 30 days of receipt of the refund application 
from the recipient agency, an amount equal to the established agreement 
value of donated food per case of end product multiplied by the number 
of cases delivered to and accepted by the recipient agency, except that 
processors may group together refund applications for a single 
recipient agency on a Federal fiscal quarterly basis if the total 
anticipated refund due that recipient agency during the quarter is 25 
dollars or less. In no event shall refund applications for purchases 
during the period of agreement be accepted by the processor later than 
60 days after the close of the agreement period.
* * * * *
    (iii) * * * FCS may consider the paperwork and resource burden 
associated with alternative value pass-through systems when considering 
approval and reserves the right to deny approval of systems which are 
labor-intensive and provide no greater accountability than those 
systems permitted under paragraph (c)(4) of this section.
* * * * *
    (7)(i) Only butter, cheese, corn grits, cornmeal, flour, macaroni, 
nonfat dry milk, peanut butter, peanut granules, roasted peanuts, rice, 
rolled oats, rolled wheat, shortening, vegetable oil, and spaghetti may 
be substituted as defined in Sec. 252.2 and such other food as FCS 
specifically approves as substitutable under paragraph (c)(7)(i)(A) of 
this section (substitution of meat and poultry items shall not be 
permitted).
    (A) Processors may request approval to substitute commercial foods 
for donated foods not listed in paragraph (c)(7)(i) of this section by 
submitting such request to FCS in writing and satisfying the 
requirements of paragraph (c)(7) of this section. FCS will notify the 
processor in writing of authorization to substitute commercial foods 
for donated foods not listed in paragraph (c)(7)(i) of this section and 
such authorization shall apply for the duration of all current 
contracts entered into by the processor pursuant to this section.
    (B) The processor shall maintain records to substantiate that it 
continues to acquire on the commercial market amounts of substitutable 
food consistent with their levels of non-NCP Program production and to 
document the receipt and disposition of the donated food.
    (C) FCS shall withhold deliveries of donated food from processors 
that FCS determines have reduced their level of non-NCP Program 
production because of participation in the NCP Program.
    (ii) When the processor seeks FCS approval to substitute donated 
nonfat dry milk with concentrated skim milk under paragraph 
(c)(7)(i)(A) of this section, an addendum must be added to the request 
which states:
    (A) The percent of milk solids that, at a minimum, must be 
contained in the concentrated skim milk;
    (B) The weight ratio of concentrated skim milk to donated nonfat 
dry milk:
    (1) The weight ratio is the weight of concentrated skim milk which 
equals one pound of donated nonfat dry milk, based on milk solids;
    (2) In calculating this weight, nonfat dry milk shall be considered 
as containing 96.5 percent milk solids;
    (3) If more than one concentration of concentrated skim milk is to 
be used, a separate weight ratio must be specified for each 
concentration;
    (C) The processor's method of verifying that the milk solids 
content in the concentrated skim milk is as stated in the request;
    (D) A requirement that the concentrated skim milk shall be produced 
in a USDA approved plant or in a plant approved by an appropriate 
regulatory authority for the processing of Grade A milk products; and
    (E) A requirement that the contact value of donated food for a 
given amount of concentrated skim milk used to produce an end product 
is the value of the equivalent amount of donated nonfat dry milk, based 
on the weight ratio of the two foods.
    (iii) Substitution must not be made solely for the purpose of 
selling or disposing of the donated commodity in commercial channels 
for profit.
* * * * *
    (14) The processor shall not assign the processing contract or 
delegate any aspect of processing under a subcontract or other 
arrangement without the written consent of FCS. The subcontractor shall 
be required to become a party to the processing contract and conform to 
all conditions contained in that contract.
* * * * *
    4. In Sec. 252.5, the first sentence of paragraph (c) is revised to 
read as follows:


Sec. 252.5  Recipient agency responsibilities.

* * * * *
    (c) Refunds. A recipient agency purchasing end products under the 
NCP Program from a processor utilizing a refund system shall submit a 
refund application supplied by the processor to the processor within 30 
days of receipt of the end products, except that recipient agencies may 
submit refund applications to a single processor on a Federal fiscal 
quarterly basis if the total anticipated refund due for all purchases 
of end product from that processor during the quarter is 25 dollars or 
less. * * *
* * * * *
    Dated: December 1, 1994.
William E. Ludwig,
Administrator.
[FR Doc. 94-30084 Filed 12-6-94; 8:45 am]
BILLING CODE 3410-30-U