[Federal Register Volume 67, Number 205 (Wednesday, October 23, 2002)]
[Rules and Regulations]
[Pages 65011-65016]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-26874]



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  Federal Register / Vol. 67, No. 205 / Wednesday, October 23, 2002 / 
Rules and Regulations  

[[Page 65011]]



DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 250

RIN 0584-AD08


Codification of Poultry Substitution and Modification of 
Commodity Inventory Controls for Recipient Agencies

AGENCY: Food and Nutrition Service, USDA.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This rule amends USDA's Food Distribution Program regulations. 
The rule has two distinct parts. The first part of the rule allows 
limited poultry substitution and full substitution of all other 
commodities except for beef and pork. The second part of the rule 
reduces current commodity recordkeeping and reporting requirements for 
some local level recipient agencies, such as schools.
    The Department has operated a demonstration project program since 
Feb. 1, 1996, which has allowed commercial poultry to be substituted 
for commodity poultry in processing. Substitution of most donated foods 
with commercial foods has always been permitted under current 
regulations. Current regulations provide a list of 16 commodities that 
may be substituted without the prior approval of the Food and Nutrition 
Service (FNS). Any other commodity, except for meat and poultry, may be 
substituted with the prior written approval of FNS under 7 CFR Sec.  
250.30(f)(4) of the current regulations. Required Certified Public 
Accountant (CPA) audits have not shown any significant problems with 
these substitution options. No substitution of inferior or non-domestic 
product has been identified. Therefore, this rule amends the 
regulations to allow limited poultry substitution, with a substitution 
plan approved by both FNS and Agriculture Marketing Service (AMS) 
grading; and full substitution for all other commodities except for 
beef and pork, on a permanent basis, without prior written approval 
form FNS.
    Secondly, because of changes in the commercial market and the food 
donation programs, USDA has tested the effects of allowing vendors to 
use commercial labels on some commodity products purchased for schools. 
Commercial labeling had already been introduced in other USDA food 
donation programs with good results. However, commercial labels 
complicate the current inventory procedures that require commodity 
inventories to be kept separate from purchased inventories. Therefore, 
FNS is amending the current inventory requirements for USDA's Child 
Nutrition Programs in order to accommodate the use of commercial labels 
on some commodity products.

EFFECTIVE DATE: This rule is effective November 22, 2002.

FOR FURTHER INFORMATION CONTACT: Suzanne Rigby, Chief, Schools and 
Institutions Branch, Food Distribution Division, Food and Nutrition 
Service, U.S. Department of Agriculture, 3101 Park Center Drive, 
Alexandria, Virginia 22302-1594, or telephone (703) 305-2644.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    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.

Regulatory Flexibility Act

    This rule has been reviewed with regard to the requirements of the 
Regulatory Flexibility Act of 1980 (5 U.S.C. 601-612). The 
Administrator of the Food and Nutrition Service has certified that this 
action will not have a significant impact on a substantial number of 
small entities. State agencies, school food authorities and schools 
choosing to utilize this new method of inventory control will be 
affected. However, the majority of entities participating in the Food 
Distribution Programs will not be affected.

Public Law 104-4

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub. 
L. 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and the private sector. Under section 202 of the UMRA, the 
Food and Nutrition Service generally must prepare a written statement, 
including a cost-benefit analysis, for proposed and final rules with 
``Federal mandates'' that may result in expenditures to State, local, 
or tribal governments, in the aggregate, or to the private sector, of 
$100 million or more in any one year. When such a statement is needed 
for a rule, section 205 of the UMRA generally requires the Food and 
Nutrition Service to identify and consider a reasonable number of 
regulatory alternatives and adopt the least costly, more cost-effective 
or least burdensome alternative that achieves the objectives of the 
rule.
    This rule contains no Federal mandates (under the regulatory 
provisions of Title II of the UMRA) for State, local, and tribal 
governments or the private sector of $100 million or more in any one 
year. Thus, this rule is not subject to the requirements of sections 
202 and 205 of the UMRA.

Executive Order 12372

    The program addressed in this action is listed in the Catalog of 
Federal Domestic Assistance under No. 10.550, and is 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).

Paperwork Reduction Act

    Information collection requirements associated with the commodity 
processing program are approved under 0584-0293. This rule deletes the 
requirement for schools to maintain a dual inventory control system. 
Although the current inventory control requirements represent a burden 
on schools, estimated at 1.8 million hours annually for recipient 
agencies, this burden was not identified to or approved by the Office 
of Management and Budget. Therefore, deleting the

[[Page 65012]]

burden requires no change to 0584-0293.
    Allowing the limited substitution of donated poultry with 
commercial poultry significantly streamlines the manufacturing process 
for processors and allows recipients to receive end products on a 
timely basis. However, this rule does not relieve the processor from 
any of the current reporting or record keeping requirements contained 
in the regulations. Therefore, no changes are required to the current 
burden hours shown in 0584-0293.

Executive Order 12988

    This final rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. The 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. 
There are no administrative procedures that must be exhausted prior to 
any judicial challenge to the provisions of this rule or the 
applications of its provisions.

Background

    The Food Distribution Program regulations (hereinafter all 
references to regulations in this rulemaking are to regulations in 
Title 7 of the Code of Federal Regulations unless indicated otherwise), 
beginning at Sec.  250.3 and continuing through Sec.  250.30, set forth 
the terms and conditions under which distributing agencies, 
subdistributing agencies, and recipient agencies may enter into 
contracts with commercial firms for the further processing of donated 
foods.
    On February 21, 2002, the Department published a proposed rule in 
the Federal Register (67 FR 7977) that would (1) Amend the Food 
Distribution regulations to allow limited substitution of poultry 
products consistent with the demonstration project in effect since 
1996; (2) make fruits, vegetables, and eggs eligible to be substituted 
under the 100 percent yield concept without prior approval from FNS; 
and (3) eliminate the requirement for recipient agencies to maintain 
inventory records for USDA purchased commodities separate from other 
food inventory. The proposed rule provided a 60-day comment period. 
This final rule implements these provisions while incorporating some of 
the changes suggested in the public comments on the proposed rule.

Analysis of Comments

    The Department received written comment from 82 different entities 
consisting of distributing agencies, recipient agencies, processors, 
consultants, and various interest groups. Forty-three commenters 
generally supported the proposed changes to the regulations. Thirty-
three commenters generally opposed the proposed changes to the 
regulations. Six commenters only offered suggestions to improve the 
final rule.

a. Poultry Substitution

    Fifteen commenters on poultry substitution, all participants in the 
demonstration project in either processing or distributing, cited their 
ability to have end products delivered ``just in time'' for use in the 
meal service as a positive reason to support the proposed regulations. 
Thirteen commenters saw savings in the costs associated with storing 
commodities. Five commenters believe poultry substitution made 
inventory procedures at commercial distributors more manageable. Four 
commenters believe that competition increased among poultry processors. 
Two recipient agency commenters cited increased participation in the 
school lunch program because they could now show consistency between 
commodity and commercial end products.
    Of the 33 commenters opposed to the proposed changes to the 
regulation, 19 opposed specific proposed changes regarding poultry 
substitution. However, not one commenter opposed the general concept of 
poultry substitution. Ten commenters believe that the proposed changes 
were too vague. They also believe that the Department did not furnish 
sufficient poultry substitution guidelines in the proposed rule. Four 
commenters on this provision believe that the proposed regulations lack 
clarity. The Department has considered the suggestions made by these 
commenters and has provided further detail for poultry substitution in 
both the preamble and regulatory text of this final rule.
    Seven commenters regarding poultry substitution believe that the 
Department had dropped the requirement that any commercial food item 
substituted for commodity product be of U.S. origin. Three commenters 
stated that the ``Buy American'' provisions of Sec.  250.23 are 
addressed in the Child Nutrition Program (CNP) regulations at Sec.  
210.21(d) and do not need to be a part of the part 250 regulations. The 
Department became aware of the purported omission of a U.S. origin 
requirement in the proposed rule during the comment period and publicly 
indicated on the Food Distribution website that this requirement still 
applies. The applicability of this requirement for substitution is 
reemphasized in this final regulation. Although ``Buy American'' is 
discussed in the CNP regulations, those regulations specifically 
address only school food authorities. Numerous other types of recipient 
agencies rely on the part 250 regulations for their guidance. 
Therefore, this rule amends the proposed language of Sec.  250.23 to 
make clear the Department's intent to have all recipient agencies ``Buy 
American'' whenever possible.
    Five commenters suggested that the Department clarify the 
definitions of ``full substitution'' and ``limited substitution.'' The 
Department agrees with these commenters and has included definitions of 
these terms in Sec.  250.3, Definitions, as subparagraphs under the 
definition of ``substitution.''
    Three commenters believe that the Department should include 
detailed penalties for processors who fail to comply with the 
regulation. The Department believes that sufficient penalties are 
already described in the regulations.
    Five commenters regarding poultry substitution believe the 
Department should publish data to support its assertion that the 
poultry demonstration projects merit a regulatory amendment to make 
this practice permanent. The public has been on notice for the last six 
years regarding the demonstration project to explore poultry 
substitution. During that period, prior to the publishing of the 
proposed rule to make the poultry substitution option permanent, the 
Department did not receive any written comment either for or against 
poultry substitution as defined in the demonstration project. However, 
during numerous public meetings over the same six years, the Department 
was continually encouraged by recipient agencies, processors, and State 
distributing agencies to make the poultry substitution option 
permanent. The Department does acknowledge that some of its pilot 
projects in more recent years have caused some reporting problems for 
both the processor and the recipients. These issues will be addressed 
as processors file the final substitution plans required under this 
rule change with FNS and AMS. The pilot programs were designed to test 
different ways of doing business in the commodity program and are a 
separate issue from poultry substitution.

b. Inventory Recordkeeping Changes

    The Department received thirty-seven comments specifically 
addressing the changes to the proposed commodity inventory and 
recordkeeping

[[Page 65013]]

requirements. Seventeen of the commenters indicated that the proposed 
changes would reduce paperwork for recipient agencies so that they 
could keep only one inventory record rather than one record for 
commodity foods and one record for purchased or commercial foods.
    Twenty commenters opposed the proposed changes to the inventory 
recordkeeping regulations. However, the Department believes that the 
discussion of a commercial labels demonstration project in the preamble 
of the proposed rule may have confused those commenters. It appears 
that all 20 of the negative commenters were expressing opposition to 
the use of commercial labels rather than the proposed regulation 
change. Of the 20, 11 represent recipient agencies that were opposed to 
the commercial labels because of the visual difficulty in separating 
them from purchased items. It is assumed that this opposition would not 
exist once the commenters understood that the proposed regulation would 
eliminate the need for recipients to keep separate inventory records. 
Three comments expressed concerns that distributors might substitute 
commodity products with commercially labeled products of lesser 
quality. However, the Department believes that the disincentives for 
substituting inferior product far outweigh any possible perceived 
financial gain from such a substitution. Three commenters expressed 
concerns about identifying commodity foods to be used in Presidentially 
declared disasters when the commodities are not recorded separate from 
purchased foods. Three commenters expressed concerns about tracking 
commodities with commercial labels in a recall situation or when 
registering a product complaint. FNS has already issued guidance for 
both supplying foods to disaster situations and for handling 
commodities in a recall or complaint situation.
    Some commenters suggested that the Department provide guidance to 
recipient agencies for implementing any new procedures resulting from 
the change in inventory requirements. The Department intends to provide 
additional guidance and technical assistance as needed.
    One commenter suggested that the Department identify specific types 
of recipient agencies for which the change is intended. The provisions 
contained in this rule relative to inventory and recordkeeping 
requirements are applicable to local-level recipient agencies 
participating in the National School Lunch Program, Child and Adult 
Care Food Program, the Nutrition Services Incentive Program, the Summer 
Food Service Program for Children, and other recipient agencies, such 
as charitable institutions and summer camps, that receive commodities 
outside of specifically authorized programs. They are not applicable to 
recipient agencies participating in the Emergency Food Assistance 
Program (TEFAP) under part 251, Food Distribution Program on Indian 
Reservations (FDPIR) under parts 253 and 254, or the Commodity 
Supplemental Food Program (CSFP) under part 247. Local level 
organizations involved in the administration of these programs are, by 
definition, subdistributing agencies and, therefore, remain subject to 
the inventory and recordkeeping requirements contained in part 250, 
except where the provisions in part 250 are inconsistent with the 
provisions contained in regulations specific to these programs. For 
example, recordkeeping requirements have been relaxed for food pantries 
and soup kitchens under part 251, the Emergency Food Assistance Program 
(TEFAP) regulations. However, since food packages containing specific 
types of commodities must be distributed monthly to eligible households 
participating in CSFP and FDPIR, and the amount of financial resources 
available to purchase such commodities are limited, inventory and 
recordkeeping requirements have not been relaxed for these programs. In 
addition, inventory and recordkeeping requirements have not been 
relaxed for TEFAP recipient agencies that distribute commodities to 
other local-level recipient agencies. At this time, FNS is of the 
opinion that maintaining current inventory and recordkeeping 
requirements at this level is a necessary means of maintaining program 
integrity given the manner in which such requirements have been relaxed 
at the food pantry and soup kitchen level. The definition of 
``subdistributing agency'' in Sec.  250.3 has been revised to clarify 
that TEFAP, CSFP, and FDPIR recipient agencies are subdistributing 
agencies.
    While the provisions contained in this rule are not intended to 
affect the administration of TEFAP, CSFP, or FDPIR recipient agencies, 
FNS will continue to examine current inventory and recordkeeping 
requirements imposed on these agencies, and where appropriate, revise 
them.

Changes in the Substitution Regulations

    Substitution of donated foods with commercial foods has always been 
permitted under current regulations. However, current regulations at 
Sec.  250.30(f)(1)(i) provide a list of 16 commodities that could be 
substituted without the prior approval of FNS. Any other commodity, 
except for meat and poultry, could be substituted with the prior 
written approval of FNS under Sec.  250.30(f)(4) of the current 
regulations. The Department is amending the regulations at Sec.  
250.30(f) to allow full substitution in the further processing of all 
commodities except for beef, pork, and poultry without prior written 
approval from FNS. Any substitution of fully substitutable commodities 
is subject to a 100-percent yield requirement. As requested by 
commenters on the proposed rule, a description of ``full substitution'' 
has been added to Sec.  250.3, as a subparagraph under the definition 
of ``substitution''. Under the 100-percent yield concept, the processor 
is responsible for all manufacturing losses. The processor must return 
to the contracting agency the same number of pounds of the commodity in 
finished end product that were delivered to the processor for further 
processing. Any commercial product substituted for donated commodity 
must be of U.S. origin and of equal or better quality than the donated 
commodity. Substitution remains an option available to processors.
    The Department is also amending the regulations at Sec.  250.30(f) 
to allow the limited substitution of commercial bulk pack poultry and 
poultry parts for USDA donated bulk pack poultry and poultry parts on a 
permanent basis. Limited substitution means that a processor can 
substitute commercial product for donated commodity product with some 
restrictions. Restrictions include, but are not limited to, the 
prohibition against substituting for backhauled commodity product. FNS 
may also prohibit substitution of certain types of the same generic 
commodity. (For example, FNS may decide to permit substitution for bulk 
chicken but not for canned chicken.) As requested by commenters on the 
proposed rule, a description of ``limited substitution'' has been added 
to Sec.  250.3, as a subparagraph under the definition of 
``substitution''. Substitution is an option available to the processor, 
not a mandatory practice. Any substitution of commercial poultry or 
poultry parts for commodity poultry or poultry parts must be performed 
using poultry of U.S origin that is equal or superior in every 
particular to the USDA specification for commodity poultry.
    Processors will need to submit a poultry substitution plan to FNS 
and AMS for approval. Once approved, the plan will be permanent. Any 
proposed

[[Page 65014]]

changes to the procedures that are addressed in the plan would require 
submission of a revised plan and approval by USDA before 
implementation.
    The following general conditions apply to all poultry substitution 
plans: Only bulk pack chicken, chicken parts, and bulk pack turkey 
delivered by USDA vendors to the processor will be eligible for 
substitution. No backhauled product will be eligible. (Backhauled 
product is typically cut-up frozen poultry parts delivered to schools 
that may be turned over to processors for further processing at a later 
time.) Substitution of commercial poultry for donated poultry may occur 
in advance of the actual receipt of the donated poultry by the 
processor. Should a processor choose to use the substitution option 
prior to the commodity being purchased by the USDA, the processor 
assumes all risks. Any variation between the amount of commercial 
poultry substituted and the amount of donated poultry received by the 
processor will be adjusted according to guidelines furnished by USDA.
    Any donated poultry not used in end products because of 
substitution can only be used by the processor at one of its facilities 
in other commercial processed products. It cannot be sold as an intact 
unit. In lieu of processing the donated poultry, however, the processor 
may use the product to fulfill other USDA contracts awarded for 
delivery to another processor provided all terms of the other contract 
are met. The substitution plan must contain (1) A step-by-step 
description of how production will be monitored; (2) a complete 
description of the records that will be maintained for (a) the 
commercial poultry substituted for the donated poultry, and (b) the 
disposition of the donated poultry delivered; and (3) how the 
substitution will be tracked for the purpose of monthly reporting to 
the State distributing agencies. As with the processing of donated 
poultry into end products, AMS graders must monitor the processing of 
any substituted commercial poultry to ensure that program integrity is 
maintained.

Changes in the Inventory Control Regulations

    Beginning in 1996, the Department piloted the use of commercial 
labels in place of USDA labels on commodities supplied to the Emergency 
Temporary Assistance Program. The use of commercial labels was also 
permitted on some price-support products that are provided to the 
National School Lunch Program. The pilot has demonstrated excellent 
benefits for recipient agencies including reduced delivery delays, 
increased competition, and reduced program costs. In addition, the 
project has helped eliminate a perceived stigma implied by the 
``generic'' USDA labels.
    However, using commercial labels has made it difficult for 
recipients to distinguish between donated commodities and commercially 
purchased items in order to comply with the current regulatory 
requirement to inventory donated commodities separately. These Federal 
requirements for inventory of donated commodities have always been more 
stringent than the Federal requirements for foods that have been 
purchased using Federal reimbursement dollars from the National School 
Lunch Program. It is recognized that schools currently must use 
generally accepted inventory and business management practices in order 
to safeguard commercially purchased products and maintain the financial 
integrity of their child nutrition operations. Therefore, during the 
period November 2000 to June 2001, the Department tested a procedure in 
two States that allowed schools to inventory commodity foods along with 
purchased foods. Anecdotal evidence from these States suggests that 
this procedure was well received and beneficial.
    For these reasons, the Department has determined that requirements 
in part 250 for separate inventory maintenance of donated commodities 
by recipient agencies are redundant and more onerous than necessary to 
safeguard the value of commodities received by schools. Therefore, the 
Department is amending the regulations at Sec.  250.13(a) to require 
that recipient agencies use specific guidance to be provided by the 
Food and Nutrition Service to value commodities for the purpose of OMB 
Circular A-133, and at Sec.  250.14(b), Sec.  250.14(e), and Sec.  
250.14(f)(1) and (f)(2) to remove the requirement that ``recipient 
agencies'' inventory USDA donated food separately. A technical 
amendment has also been made in Sec.  250.14(c) to improve sentence 
structure. Section 250.14(e) is revised to reduce physical inventory 
requirements for recipient agencies in this section. State warehouses, 
State contracted commercial warehouses, and subdistributing agencies 
continue to be required to maintain separate inventories of donated 
commodities. They also are required to continue to perform annual 
physical inventories and reconciliation of donated commodities.

List of Subjects in 7 CFR Part 250

    Administrative practice and procedure, Food assistance programs, 
Grant programs, Social programs, Indians, Reporting and record keeping 
requirements, Surplus agricultural commodities.

    Accordingly, 7 CFR part 250 is amended to read 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, 2014, 2025; 15 U.S.C. 713c; 22 
U.S.C. 1922; 42 U.S.C. 1751, 1755, 1758, 1760, 1761, 1762a, 1766, 
3030a, 5179, 5180.


    2. In Sec.  250.3:
    a. Revise the definition of Subdistributing agency; and
    b. In the definition for Substitution, remove ``; or'' at the end 
of paragraph (a) and add in its place a period and add new paragraphs 
(c) and (d).
    The revision and additions read as follows:


Sec.  250.3  Definitions.

* * * * *
    Subdistributing agency means an agency performing one or more 
distribution functions for a distributing agency other than, or in 
addition to, functions normally performed by common carriers or 
warehousemen. A subdistributing agency may also be a recipient agency. 
State and local agencies, and Indian Tribal Organizations administering 
the Emergency Food Assistance Program, the Food Distribution Program on 
Indian Reservations, or the Commodity Supplemental Food Program, are 
subdistributing agencies subject to all provisions relative to 
subdistributing agencies contained in this part, unless specifically 
exempt under part 251, part 253, part 254, or part 247 of this chapter.
* * * * *
    Substitution * * *
    (c) A processor can substitute commercial product for donated 
commodity, as described in paragraph (a) of this section, without 
restrictions under full substitution. The processor must return to the 
contracting agency, in finished end products, the same number of pounds 
of commodity that the processor originally received for processing 
under full substitution. This is the 100-percent yield requirement.
    (d) A processor can substitute commercial product for donated 
commodity product, as described in paragraph (a) of this section, with 
some

[[Page 65015]]

restrictions under limited substitution. Restrictions include, but are 
not limited to, the prohibition against substituting for backhauled 
poultry commodity product. FNS may also prohibit substitution of 
certain types of the same generic commodity. (For example, FNS may 
decide to permit substitution for bulk chicken but not for canned 
chicken.)
* * * * *

    3. In Sec.  250.13 add a new sentence at the end of paragraph 
(a)(5) to read as follows:


Sec.  250.13  Distribution and control of donated foods.

    (a) * * *
    (5) * * * For purposes of complying with OMB Circular A-133, Audits 
of States, Local Governments, and Non-Profit Organizations on inventory 
valuation, recipient agencies shall comply with guidance provided by 
the Food and Nutrition Service. (For availability of OMB Circulars 
referenced in this paragraph (a), see 5 CFR 1310.3.)
* * * * *

    4. In Sec.  250.14:
    a. Remove the word ``Stock'' at the beginning of paragraph (b)(4) 
and add in its place the words ``Excepting recipient agencies, stock'';
    b. Remove the word ``Conduct'' from the beginning of the third 
sentence in paragraph (c) and add in its place the word ``conduct'', 
and remove the period at the end of the second sentence;
    c. Revise paragraph (e);
    d. Remove the words ``or recipient agency's'' in paragraph (f)(1) 
introductory text and add in its place the word ``agency's''; and
    e. Remove the words ``and recipient agencies'' in the second 
sentence of paragraph (f)(2).
    The revision reads as follows:


Sec.  250.14  Warehousing, distributing and storage of donated foods.

* * * * *
    (e) Physical inventory. During the annual review required by 
paragraph (c) of this section, distributing agencies and 
subdistributing agencies shall take a physical inventory of their 
storage facilities. The physical inventory shall be reconciled with 
each storage facility's book inventory. The reconciliation records 
shall be maintained by the agency that contracted for or maintained the 
storage facility. Food items that have been lost, stolen, or found to 
be out of condition, shall be identified and recorded. Potential 
excessive inventory, as described in paragraph (f) of this section, 
shall be reported by the subdistributing agency to the distributing 
agency. Corrective action on each deficiency noted during these 
inventories shall be initiated immediately, and a written report of 
those corrective actions shall be forwarded to the distributing agency. 
Where applicable, the distributing agency shall pursue claims in 
accordance with Sec.  250.15(c).
* * * * *

    5. In Sec.  250.16, revise paragraph (a)(2) to read as follows:


Sec.  250.16  Maintenance of records.

    (a) * * *
    (2) Distributing agencies shall require all subdistributing 
agencies to maintain accurate and complete records with respect to the 
receipt, distribution/disposal, and inventory of donated foods, 
including end products processed from donated foods. Subdistributing 
agencies and recipient agencies must document any funds that arise from 
the operation of the distribution program, including refunds made to 
recipient agencies by a processor in accordance with Sec.  250.30(k). 
Further, these documents should allow an independent determination of 
the specific accounts that benefit from these funds.
* * * * *

    6. In Sec.  250.23, revise paragraph (a)(2) to read as follows:


Sec.  250.23  Buy American.

    (a) * * *
    (2) A food product manufactured in the U.S. primarily using food 
grown in the U.S.
* * * * *

    7. In Sec.  250.30:
    a. Revise paragraph (f)(1) introductory text;
    b. Remove paragraph (f)(1)(i) and redesignate paragraph (f)(1)(ii) 
as paragraph (f)(1)(i); add a new paragraph (f)(1)(ii);
    c. Revise newly redesignated paragraph (f)(1)(i);
    d. Remove the words ``specifically listed in paragraph (f)(1)(i) of 
this section'' in the second sentence of paragraph (f)(2);
    e. Remove the words ``by the Agricultural Stabilization and 
Conservation Service (ASCS) in the original inspection of donated 
foods'' in the fourth sentence of paragraph (f)(2) and add in their 
place the words ``in the original USDA procurement specification'';
    f. Remove paragraph (f)(4) and redesignate paragraph (f)(5) as 
paragraph (f)(4); and
    g. Amend the introductory text of paragraph (g) by adding a 
sentence after the second sentence.
    The revisions and additions read as follows:


Sec.  250.30  State processing of donated foods.

* * * * *
    (f) * * * (1) The processing contract may provide for substitution 
of donated foods as defined in Sec.  250.3 except that donated beef and 
donated pork shall not be substitutable. Any substitution of commercial 
product for commodities other than beef, pork, or poultry is subject to 
a 100-percent yield requirement. Under the 100-percent yield 
requirement, the processor is responsible for any manufacturing losses.
    (i) All components of commercial foods substituted for any donated 
food must be of U.S. origin and identical or superior in every 
particular of the donated food specification. Records must be 
maintained to allow independent verification that the substituted food 
meets the above condition.
    (ii) Poultry shall be eligible for limited substitution. Any 
processors that wish to substitute poultry must have a plan approved by 
both FNS and AMS. Only bulk pack chicken, chicken parts, and bulk pack 
turkey delivered by USDA vendors to the processor are eligible for 
substitution. No backhauled poultry product may be substituted. 
(Backhauled product is typically cut-up frozen poultry parts delivered 
to schools that may be turned over to processors for further processing 
at a later time.) Should a processor want to amend its approved plan, 
it shall submit any amendments to USDA for approval prior to 
implementing such amendments.
    (A) Substitution of commercial poultry may occur in advance of the 
actual receipt of the donated poultry by the processor. Should a 
processor choose to use the substitution option prior to the commodity 
being purchased by the USDA, the processor shall assume all risks. Any 
donated poultry not used in end products because of substitution shall 
only be used by the processor at one of its facilities in other 
commercially processed products and cannot be sold as an intact unit. 
However, in lieu of processing the donated poultry, the processor may 
use the commodity product to fulfill other USDA contracts awarded for 
delivery to another processor provided all terms of the other contract 
are met. Any variation between the amount of commercial poultry 
substituted and the amount of donated poultry received by the processor 
shall be adjusted according to guidelines furnished by USDA.

[[Page 65016]]

    (B) The substitution plan shall contain a step-by-step description 
of how production will be monitored; a complete description of the 
records that will be maintained for the commercial poultry substituted 
for the donated poultry and the disposition of the donated poultry 
delivered; and how the substitution will be tracked for the purpose of 
monthly reporting to the State distributing agencies. Poultry 
substitution shall not be subject to the 100-percent yield requirement; 
however, the AMS Grading Service must verify processing yields. Should 
a processor choose to have all production of a specific end product, 
identified by name and product code, produced under AMS grading, then 
the label ``Contains Commodities Donated by the United States 
Department of Agriculture. This Product Shall Only Be Sold to Eligible 
Recipient Agencies'' shall not be required. Finished poultry end 
products that have not been produced under AMS grading supervision may 
not be substituted for finished commodity end products.
* * * * *
    (g) * * * As with the processing of donated poultry into end 
products, AMS graders must monitor the processing of any substituted 
commercial poultry to ensure that program integrity is maintained. * * 
*
* * * * *

    Dated: October 16, 2002.
Roberto Salazar,
Administrator, Food and Nutrition Service.
[FR Doc. 02-26874 Filed 10-22-02; 8:45 am]
BILLING CODE 3410-30-P