[Federal Register Volume 83, Number 84 (Tuesday, May 1, 2018)]
[Rules and Regulations]
[Pages 18913-18934]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-09168]



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 Rules and Regulations
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  Federal Register / Vol. 83, No. 84 / Tuesday, May 1, 2018 / Rules and 
Regulations  

[[Page 18913]]



DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 250

[FNS-2017-0001]
RIN 0584-AE38


Revisions and Clarifications in Requirements for the Processing 
of Donated Foods

AGENCY: Food and Nutrition Service (FNS), USDA.

ACTION: Final rule.

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

SUMMARY: This rule revises and clarifies requirements for the 
processing of donated foods in order to: Incorporate successful 
processing options tested in demonstration projects into the 
regulations, ensure accountability for donated foods provided for 
processing, increase program efficiency and integrity, and support 
vendor and State operability. The rule requires multi-State processors 
to enter into National Processing Agreements to process donated foods 
into end products, permits processors to substitute commercially 
purchased beef and pork of U.S. origin and of equal or better quality 
for donated beef and pork, and streamlines and modernizes oversight of 
inventories of donated foods at processors. The rule also revises 
regulatory provisions in plain language, to make them easier to read 
and understand.

DATES: This rule is effective July 2, 2018.

FOR FURTHER INFORMATION CONTACT: Kiley Larson or Erica Antonson at Food 
Distribution Division, Food and Nutrition Service, 3101 Park Center 
Drive, Room 506, Alexandria, Virginia 22302, or by telephone (703) 305-
2680.

SUPPLEMENTARY INFORMATION:

I. Background and Description of Comments Received

    In a proposed rule published in the Federal Register on January 5, 
2017 (82 FR 1231), Food Nutrition Service (FNS) proposed to amend Food 
Distribution regulations at 7 CFR part 250 to revise and clarify 
requirements for the processing of donated foods, in order to formalize 
processing options already being used in current practice, incorporate 
input received from processors and State and local agencies 
administering child nutrition programs, and rewrite much of 7 CFR part 
250 Subpart C in a more user-friendly, ``plain language'' format. The 
Department of Agriculture (the Department or USDA) provides donated 
foods to State distributing agencies for distribution to recipient 
agencies (e.g., school food authorities) participating in the National 
School Lunch Program (NSLP) and other child nutrition or food 
distribution programs. In accordance with Federal regulations in 7 CFR 
part 250, distributing agencies may provide the donated foods to 
commercial processors for processing into end products for use in NSLP 
or other food programs.
    For example, a whole chicken or chicken parts may be processed into 
precooked grilled chicken strips for use in NSLP. The ability to divert 
donated foods for further processing provides recipient agencies with 
more options for using donated foods in their programs. Program 
regulations ensure that State and recipient agencies, and program 
recipients, receive the full benefit of the donated foods provided to 
such processors for processing into end products.
    FNS solicited comments through April 5, 2017, on the provisions of 
the proposed rulemaking. These comments are discussed below and are 
available for review at www.regulations.gov. To view the comments 
received, enter ``FNS-2017-0001'' in the search field on the main page 
of www.regulations.gov. Then click on ``Search.'' Under ``Document 
Type'', select ``Public Submission''.
    FNS received 31 written comments regarding the proposed provisions 
from three associations and advocacy groups, eight State agencies, one 
recipient agency, thirteen private companies, and six individuals who 
did not identify an affiliation with an organization. Twelve of the 
comments received were duplicates of the comment submission from the 
American Commodity Distribution Association (ACDA). Two comments were 
supportive of the rule as proposed, in its entirety. The majority of 
the comments were supportive but recommended changes to add clarity and 
consistency to the language in the regulations.
    Some commenters were supportive of the rule but opposed to a 
specific provision. There were no comments in opposition of the 
proposed rule as a whole.
    Most commenters in support of the proposed rule indicated they were 
in favor of the clarifying changes and the consolidation of 
requirements previously tested in demonstration projects. Commenters 
also supported measures in the proposed rule to reduce administrative 
and reporting burdens on State distributing agencies and to streamline 
participation for industry stakeholders processing USDA Donated Foods.
    Most commenters requested further clarification and guidance on the 
proposed rule and the provisions being changed. Specifically, 
commenters requested clarification on:
     The terminology used in the rule to ensure clear 
understanding of the intent and meaning of proposed provisions and 
requests to include commonly-used industry terms;
     The roles and responsibilities of FNS, State distributing 
agency, recipient agency, processor, and distributor staff in 
implementing some of the proposed provisions;
     The rationale behind some of the proposed provisions, 
including the allowable duration of some agreements required in the 
proposed rule;
     Whether certain entities, such as commercial entities 
using USDA Donated Foods in the preparation of meals, are designated as 
processors under the proposed rule;
     The process by which FNS establishes and disseminates the 
replacement value for USDA Donated Foods; and
     The method of oversight and enforcement that would be used 
for some of the proposed provisions including the proposed requirement 
for processors and distributors to enter into agreements with each 
other and the proposed requirement for any credit for

[[Page 18914]]

the sale of by-products to be passed through to the recipient agency.
    Commenters also requested that USDA:
     Collect, review, and file the agreements between 
processors and distributors required by the proposed rule;
     Include a provision in the final rule prohibiting 
distributors from acting as authorized agents of recipient agencies;
     Remove the provision in the proposed rule that discourages 
the pooling of inventory at distributors acting as the authorized agent 
of recipient agencies and instead establish a requirement for each 
distributor to enter into an agreement with FNS that (1) outlines 
distributor requirements, (2) transfers title of USDA Donated Foods to 
distributors when foods are in their possession, and (3) requires 
distributors to submit a surety bond to FNS to protect the value of 
USDA Donated Foods in their possession; and
     Include a provision in the final rule establishing the 
required method of calculation of inventory levels at processors and 
reducing the number of months used in the calculation from 12 to 10. 
This calculation, including the number of months used, is currently 
described in a Policy Memorandum.

II. Analysis of Comments Received and Regulatory Revisions, 7 CFR Part 
250

A. Definitions, Sec.  250.2

    In Sec.  250.2 we proposed to remove, revise, and add definitions 
relating to processing of donated foods. We proposed to remove the 
definitions of ``Contracting agency'' and ``Fee-for-service.'' We 
proposed to replace the term ``Contracting agency'' throughout the 
regulation with the specific agency (i.e., distributing and/or 
recipient agency) that may enter into a processing agreement. The 
meaning of the term ``Fee-for-service'' is clear in the context of the 
proposed regulatory provisions and no longer requires a separate 
definition. No comments were received on these proposed definition 
removals. Thus, the proposed removals are retained without change in 
this final rule.
    We proposed to add definitions of ``Backhauling,'' ``Commingling,'' 
``End product data schedule,'' ``In-State Processing Agreement,'' 
``National Processing Agreement,'' ``Recipient Agency Processing 
Agreement,'' ``Replacement value,'' and ``State Participation 
Agreement.'' The definition of ``Backhauling'' would describe a means 
of delivery of donated food to a processor from a recipient agency's 
storage facility.
    The definition of ``Commingling'' would describe the common storage 
of donated foods with commercially purchased foods.
    The definition of ``End product data schedule'' would convey the 
important function of this document in describing the processing of 
donated foods into finished end products. The definitions of ``National 
Processing Agreement,'' ``Recipient Agency Processing Agreement,'' 
``State Participation Agreement,'' and ``In-State Processing 
Agreement'' would help the reader understand the different types of 
processing agreements permitted. These processing agreements are 
further described in Sec.  250.30 of this final rule. No comments were 
received on these proposed definition additions. Thus, the proposed 
definitions are retained without change in this final rule.
    The definition of ``Replacement value'' would clarify the donated 
food value that must be used by processors to ensure compensation for 
donated foods lost in processing or other activities. The definition of 
``Replacement value'' reflects the price in the market at the time that 
the Department assigns the value whereas the definition of ``Contract 
value'' in current regulations reflects the Department's current 
acquisition price, which is set annually. One commenter requested that 
the definition be amended to include any justifications that may be 
used to determine when the values will be changed and the method USDA 
would use to disseminate changed values. Replacement value is only 
changed by the Department in rare cases and only under special 
circumstances.
    Under these special circumstances, the need to adjust the 
replacement value is determined on a case-by-case basis through 
consultation with the relevant State and local agencies. Changes are 
communicated directly to State and local agencies and the 
justifications for changes will vary significantly from case to case. 
Thus, the proposed definition is retained without change in this final 
rule.

B. Delivery and Receipt of Donated Food Shipments, Sec.  250.11

    In Sec.  250.11(e), we proposed to describe the timing of transfer 
of title to donated foods and the agency to which title is transferred, 
in accordance with the amendments made by Section 4104 of the 
Agricultural Act of 2014 (Pub. L. 113-79) to Section 17 of the 
Commodity Distribution Reform Act and WIC Amendments of 1987, 7 U.S.C. 
612c note, and the requirements under National Processing Agreements in 
this rule. In Sec.  250.11(e) we proposed that the title to donated 
foods provided to a multi-State processor, in accordance with its 
National Processing Agreement, transfers to the distributing or 
recipient agency, as appropriate, upon the acceptance of finished end 
products at the time and place of delivery. No comments were received 
on this proposed change. Thus, the proposed language is retained 
without change in this final rule.
    In Sec.  250.11(e), we also proposed to require that when a 
distributor is contracted by the recipient agency for the 
transportation and/or storage of finished end products and is acting as 
the recipient agency's authorized agent (i.e., purchasing processed end 
products containing donated foods on behalf of the recipient agency), 
title of donated foods would transfer to the recipient agency upon the 
acceptance of finished end products at the time and place of delivery 
at the recipient agency, or the distributor acting as the authorized 
agent of the recipient agency, whichever happens first. Many recipient 
agencies receiving finished end products from multi-State processors 
contract with a distributor to store end products and/or transport the 
finished end products to their facilities. The inclusion of 
distributors in the supply chain for finished end products creates 
challenges related to tracking and reporting the value of donated 
foods. Because processors are not a party to the contractual 
relationship between recipient agencies and distributors, processors 
lose control of finished end products once they are delivered to the 
distributors designated by each recipient agency. Pursuant to current 
regulations, however, processors are required to maintain a bond for 
the value of those finished end products.
    As a result, in situations where recipient agencies contract with a 
distributor to store and/or transport processed end products containing 
donated foods and act as their authorized agent, complications can 
arise that may impede the transfer of title described above. Some 
processors and distributors, working in this manner, manufacture and/or 
order some processed end products prior to receiving donated food 
orders from recipient agencies. This is sometimes termed ``inventory 
pooling'' (as illustrated below). Under current regulations, title 
cannot transfer to the recipient agency at the time of delivery at its 
contracted distributor because neither the processor nor the 
distributor know which recipient agency will receive which products.

[[Page 18915]]

    The intent of Sec.  250.11(e) is to discourage the pooling of 
processed end products.
[GRAPHIC] [TIFF OMITTED] TR01MY18.012

    Many comments were received on this provision ranging from overall 
support to overall opposition. One commenter expressed strong support 
for the provision, claiming that it would increase efficiency and 
program integrity.
    One commenter expressed support for the provision but requested 
clarification that title for donated foods will never transfer to the 
distributor but will only transfer from USDA to the recipient agency. 
Thirteen commenters expressed understanding of the Department's 
position to include the provision but requested clarifying language be 
included to instruct processors to closely monitor distributor 
transactions and reporting practices, and to label the practice as it 
is known, inventory pooling.
    In response, we would point out that processors should always 
closely monitor distributor transactions and reporting practices to 
ensure that all parties are adhering to the requirements of 7 CFR part 
250 and the processor's processing agreement. Transaction monitoring 
and reporting maybe outlined in the agreement between the distributor 
and processor required in Sec.  250.30(i). Inventory pooling, in this 
context, refers to a practice employed by distributors. Sec.  250.11(e) 
is focused on clarifying when title transfers, ensuring that processors 
know which School Food Authority (SFA) is accepting ownership of end 
products. Therefore, the term ``pooling'' is not referenced in the 
regulatory text.
    One commenter acknowledged the challenges that the practice of 
inventory pooling creates for entities within the end product supply 
chain but suggested alternate methods for addressing them.

[[Page 18916]]

The alternate methods suggested were prohibiting distributors from 
acting as authorized agents of SFAs and requiring that distributors 
enter into agreements with FNS to furnish a surety bond for donated 
foods in their inventory or transfers title to donated foods to 
distributors while in their inventory. Current statutory provisions do 
not permit the transfer of title of donated foods to a distributor or a 
requirement for a distributor to furnish a surety bond to USDA. In 
addition, a regulatory change of this magnitude must be subject to 
public review and comment prior to being codified. Therefore, FNS is 
not able to implement these alternatives at this time.
    Two commenters expressed strong opposition to the provision. The 
commenters felt that inventory pooling provided flexibility for 
distributors and allowed them to more easily serve recipient agencies. 
Similar to other commenters on this provision, the commenters felt that 
an alternative could be to require distributors to enter into 
agreements with FNS to furnish a surety bond for donated foods in their 
inventory. For the reasons described in the previous paragraph, this 
proposed alternative cannot be implemented at this time. The commenters 
also expressed concerns about the administrative burden associated with 
maintaining separate school-owned inventories for each eligible 
recipient agency, including individual stock keeping units (SKUs) for 
each end product and recipient agency. This interpretation of the 
intent of this provision is incorrect. FNS does not expect distributors 
to maintain separate physical inventories for every eligible recipient 
agency as the commenters describe. Doing so would be overly burdensome 
and would contradict the long-established concept of substitution in 
USDA Foods processing. However, FNS understands that this provision may 
require further guidance and that there may be potential benefits of 
establishing a different accountability mechanism for processed end 
products at distributors through agreements or other mechanisms. FNS 
will explore whether potential pilot projects could be used to test 
these approaches. The proposed provision is retained without change in 
this final rule.

C. Reporting Requirements, Sec.  250.18

    In Sec.  250.18(b) we proposed to retain the requirement for 
processors to submit monthly performance reports to the distributing 
agency. However, we proposed to replace the reference to Sec.  
250.30(m) with Sec.  250.37(a) as the section is being re-designated 
and revised. No comments were received on this proposed change. Thus, 
the proposed language is retained without change in this final rule.

D. Recordkeeping Requirements, Sec.  250.19

    In Sec.  250.19(a) we proposed to amend the recordkeeping 
requirements for processors and instead reference specific 
recordkeeping requirements for processors contained in Subpart C. No 
comments were received on this proposed change. Thus, the proposed 
language is retained without change in this final rule.

E. Subpart C--Processing of Donated Foods

    FNS proposed to completely revise current Subpart C of 7 CFR part 
250 to more clearly present the specific processing requirements and 
rewrite these sections in plain language. We proposed to include the 
requirements for specific processing activities in the order in which 
they most commonly occur; i.e., entering into processing agreements, 
processing of donated foods into end products, sale of end products, 
submission of reports, etc. We also proposed to change the heading of 
Subpart C to Processing of Donated Foods. Comments received on this 
Subpart are outlined below. The new sections proposed under the revised 
Subpart C include the following:

250.30 Processing of donated foods into end products.
250.31 Procurement requirements.
250.32 Protection of donated food value.
250.33 Ensuring processing yields of donated foods.
250.34 Substitution of donated foods.
250.35 Storage, food safety, quality control, and inventory 
management.
250.36 End product sales and crediting for the value of donated 
foods.
250.37 Reports, records, and reviews of processor performance.
250.38 Provisions of agreements.
250.39 Miscellaneous provisions.
1. Processing of Donated Foods Into End Products, Sec.  250.30
    In Sec.  250.30, we proposed to state clearly why donated foods are 
provided to processors for processing, and we proposed to describe the 
different types of processing agreements permitted, including National, 
In-State, and Recipient Agency Processing Agreements. However, we 
proposed to include the specific provisions required for each type of 
agreement in Sec.  250.38, as the reason for their inclusion would only 
be clear with an understanding of the processing requirements contained 
in the preceding sections.
    In Sec.  250.30(a), we proposed to describe the benefit of 
providing donated foods to a processor for processing into end 
products, and we proposed to clarify that a processor's use of a 
commercial facility to repackage donated foods, or to use donated foods 
in the preparation of meals, is also considered processing in 7 CFR 
part 250. Two commenters requested that this provision be amended to 
clarify that repackaging of USDA Donated Foods in meals that are vended 
to a school food authority is subject to the processing requirements in 
7 CFR part 250. To clarify our intent in this final rule, the words ``A 
processor's'' are deleted from the last sentence of Sec.  250.30(a) to 
indicate that any commercial entity's use of a commercial facility to 
repackage donated foods, or to use donated foods in the preparation of 
meals, is also considered processing in 7 CFR part 250.
    Two commenters expressed concerns that considering meal vendors as 
processors under 7 CFR part 250 could impact competition and limit the 
use of USDA Donated Foods at recipient agencies contracted with meal 
vendors. The commenters requested that meal vendors be permitted to 
operate in a similar manner as Food Service Management Companies which 
must receive USDA Donated Foods and prepare meals at the recipient 
agency's facility. Meal vendors have long been considered processors 
under current regulations. The final rule is only clarifying an already 
established requirement. Thus, the proposed provision is retained 
without change in this final rule. We also want to clarify that SFAs 
providing meals containing USDA Donated Foods to another recipient 
agency under an intergovernmental agreement are not considered 
processors in this part.
    In Sec.  250.30(b), we proposed to clarify that processing of 
donated foods must be performed in accordance with an agreement between 
the processor and FNS, between the processor and the distributing 
agency, or, if permitted by the distributing agency, between the 
processor and a recipient agency (or subdistributing agency). We 
proposed to include in Sec.  250.30(b) the stipulation in current Sec.  
250.30(c)(5)(ix) that an agreement may not obligate the distributing or 
recipient agency, or FNS, to provide donated foods to a processor for 
processing. We proposed to clarify that the agreements described in 
this section are required in addition to, not in lieu of, competitively 
procured contracts required in accordance with Sec.  250.31. We 
proposed to revise the requirement in current Sec.  250.30(c)(4)

[[Page 18917]]

that indicates which official of the processor must sign the processing 
agreement and more simply state in proposed Sec.  250.30(b) that the 
processing agreement must be signed by an authorized individual acting 
for the processor. We proposed to remove the stipulation in current 
Sec.  250.30(c)(1) that a processing agreement must be in standard 
written form. No comments were received on the proposed changes in this 
subsection. Thus, the proposed provision is retained without change in 
this final rule.
    In Sec.  250.30(c), we proposed to require that a multi-State 
processor enter into a National Processing Agreement with FNS to 
process donated foods into end products, in accordance with end product 
data schedules approved by FNS. We also indicated that, in the proposed 
Sec.  250.32, FNS holds and manages the multi-State processor's 
performance bond or letter of credit to protect the value of donated 
food inventories under the National Processing Agreement. We indicated 
that FNS does not itself procure or purchase end products under such 
agreements, and that a multi-State processor must enter into a State 
Participation Agreement with the distributing agency in order to sell 
nationally approved end products in the State, as in the proposed Sec.  
250.30(d). No comments were received on the proposed changes in this 
subsection. Thus, the proposed provision is retained without change in 
this final rule.
    In Sec.  250.30(d), we proposed to require the distributing agency 
to enter into a State Participation Agreement with a multi-State 
processor to permit the sale of end products produced under the 
processor's National Processing Agreement in the State, as previously 
indicated. The State Participation Agreement is currently utilized in 
conjunction with National Processing Agreements in the demonstration 
project. Under the State Participation Agreement, we proposed to permit 
the distributing agency to select the processor's nationally approved 
end products for sale to eligible recipient agencies within the State 
or to directly purchase such end products. The processor may provide a 
list of such nationally approved end products in a summary end product 
data schedule. We also proposed to permit the distributing agency to 
include other processing requirements in the State Participation 
Agreement, such as the specific methods of end product sales permitted 
in the State, in accordance with the proposed Sec.  250.36, (e.g., a 
refund, discount, or indirect discount method of sales), or the use of 
labels attesting to fulfillment of meal pattern requirements in child 
nutrition programs. We proposed to require the distributing agency to 
utilize selection criteria in current Sec.  250.30(c)(1) to select 
processors with which to enter into State Participation Agreements. No 
comments were received on State Participation Agreements overall.
    However, one commenter requested that ``the marketability or 
acceptability of end products'' be removed from the list of selection 
criteria that State agencies must evaluate prior to entering into State 
Participation Agreements with multi-State processors. The commenter 
felt that the requirement was burdensome and impractical for large 
States. Marketability and acceptability are important factors for end 
products served in child nutrition programs to ensure that products are 
well-suited to the local market and promote the use of donated foods. 
The requirement to include marketability and acceptability as selection 
criteria is long standing, and State agencies have discretion in how 
they evaluate products under these criteria. Thus, the proposed 
provision is retained without change in this final rule.
    In Sec.  250.30(e), we proposed to clarify the distinction between 
master agreements and other In-State Processing Agreements and to 
include in this proposed section the required criteria in current Sec.  
250.30(c)(1) for distributing agencies that procure end products on 
behalf of recipient agencies or that limit recipient agencies' access 
to the procurement of specific end products through its master 
agreements. We proposed to require that the distributing agency enter 
into an In-State Processing Agreement with an in-State processor (i.e., 
a processor which only services recipient agencies in a single State 
via a production facility located in the same State) to process donated 
foods, as currently required under the demonstration project. Under all 
In-State Processing Agreements, the distributing agency must approve 
end product data schedules submitted by the processor, hold and manage 
the processor's performance bond or letter of credit, and assure 
compliance with all processing requirements.
    No comments were received on In-State Processing Agreements 
overall, however one commenter requested that marketability and 
acceptability be removed from the list selection criteria that State 
agencies must evaluate prior to entering into an In-State Processing 
Agreement with an in-State processor. As stated above, marketability 
and acceptability are important factors for end products served in 
child nutrition programs and the requirement to include them as a 
selection criteria is long standing. One commenter also requested that 
additional detail be included instructing State agencies on how to 
calculate bond and letter of credit levels for in-State processors. As 
proposed, Sec.  250.30(e), provides State agencies with the flexibility 
to set bond and letter of credit levels to reflect State laws and the 
status of their State's processing market. However, FNS recognizes that 
State agencies may benefit from further guidance and will explore 
whether policy guidance can be used to aid States on this matter. Thus, 
the proposed provision is retained without change in this final rule.
    In Sec.  250.30(f), we proposed to allow distributing agencies to 
permit recipient agencies (or subdistributing agencies) to enter into 
agreements with processors to process donated foods and to purchase the 
finished end products. These agreements are referred to as Recipient 
Agency Processing Agreements. We also proposed to clarify that, under 
such agreements, the distributing agency may also delegate oversight 
and monitoring to the recipient agency to approve end product data 
schedules or select nationally approved end product data schedules, 
review processor performance reports, manage the performance bond or 
letter of credit of an in-State processor, and monitor other processing 
activities. All such activities must be performed in accordance with 
the requirements of this part. We proposed to clarify that a recipient 
agency may also enter into a Recipient Agency Processing Agreement, and 
perform the activities described above, on behalf of other recipient 
agencies, in accordance with an agreement between the parties (such as 
in a school cooperative). We proposed to require the recipient agency 
to utilize selection criteria in current Sec.  250.30(c)(1) to select 
processors with which to enter into Recipient Agency Processing 
Agreements. The distributing agency must approve all Recipient Agency 
Processing Agreements. No comments were received on this proposed 
provision. Thus, the proposed language is retained without change in 
this final rule.
    In Sec.  250.30(g), we proposed to retain the requirement that 
distributing agencies must test end products with recipient agencies 
prior to entering into processing agreements, to ensure that they will 
be acceptable to recipient agencies. We proposed to clarify that the 
requirements only apply to distributing agencies that procure end 
products on behalf of recipient agencies or otherwise limit recipient 
agencies' access to the

[[Page 18918]]

procurement of specific end products, and we proposed to clarify that 
the distributing agency may permit recipient agencies to test end 
products. We also proposed to amend the current requirement that the 
distributing agency develop a system to monitor product acceptability 
on a periodic basis by requiring instead that the distributing agency, 
or its recipient agencies, must monitor product acceptability on an 
ongoing basis. No comments were received on this proposed provision. 
Thus, the proposed language is retained without change in this final 
rule.
    In Sec.  250.30(h), we proposed that a processor may not assign any 
processing activities under its processing agreement, or subcontract 
with another entity to perform any aspect of processing, without the 
written consent of the other party to the agreement, which may be the 
distributing, subdistributing, or recipient agency, or FNS. We proposed 
to permit the distributing agency to provide the required written 
consent as part of its State Participation Agreement or In-State 
Processing Agreement with the processor. One commenter requested that 
we require distributing agencies to approve of subcontractors in its 
State Participation Agreement with the processor. The National 
Processing Agreement requires subcontractor agreements but States 
should have flexibility in how they provide written consent for 
subcontracting. Thus, the proposed language is retained without change 
in this final rule.
    In Sec.  250.30(i), we proposed to require agreements between 
processors and distributors. We proposed that the agreement, initiated 
by the processor before releasing finished end products to a 
distributor, must reference, at a minimum, the financial liability 
(i.e., who must pay) for the replacement value of donated foods, not 
less than monthly end product sales reporting frequency, requirements 
under Sec.  250.11, and the applicable value pass through system to 
ensure that the value of donated foods and finished end products are 
properly credited to recipient agencies. We also proposed that 
distributing agencies could set additional requirements such as 
requiring that copies or templates of these agreements be included with 
the submission of signed State Participation Agreements. Many comments 
were received on this provision.
    One commenter noted strong support for this provision overall, but 
requested that clarifying language be added to the provision to 
prescribe that financial liability for donated foods in the agreement 
is assigned to the party that caused a loss or negative balance to 
occur. These agreements are designed to allow processors and 
distributors to draft an agreement that mutually protects each of their 
interests, including financial liability. FNS will not be a party to 
these agreements and does not want to dictate, in regulations, the 
structure of specific provisions for all situations that the parties 
may encounter. Therefore, this language will not be included in the 
final rule. However, FNS will explore whether further policy guidance 
on this matter is needed. The commenter also requested that provisions 
be added to specifically address distributors, including requiring 
written agreements between a distributor and FNS that covers liability, 
reporting, and delivery requirements. FNS does not maintain a direct 
relationship with distributors. Therefore, this language will not be 
included in the final rule.
    Fourteen commenters noted support for the provision but requested 
that we add a requirement that agreements between processors and 
distributors must be submitted to FNS for review and record keeping. 
FNS will not be a party to these agreements and is not in a position to 
evaluate if individual agreements are appropriate. States will also not 
be required to review or collect these agreements. However, we agree 
with the importance of having an oversight mechanism in place to ensure 
that the agreements are in place as required. Verification of these 
agreements will be required as part of the audits that processors must 
obtain under current requirements at Sec.  250.20(b). Moreover, 
requiring processors to submit these agreements to FNS for review and 
record keeping would impose an additional information collection 
burden. Such a provision would require a separate rule and would be 
subject to public comment. Therefore, this language will not be 
included in the final rule.
    One commenter noted support for the provision but requested that 
agreements between processors and distributors be made permanent. Under 
the proposal, the duration of these agreements is up to the specific 
processor and distributor in the agreement. If both parties agree, the 
agreement could be permanent. Therefore, no change is being made in the 
final rule. The commenter also requested that the required reporting 
frequency in the agreement be increased from the proposed ``not less 
than monthly'' to ``not more than five calendar days.'' The commenter 
felt that the more frequent reporting would improve coordination 
between the processor and distributor and allow the processor to be 
more timely with the monthly performance reports. Improvements in 
technology are allowing many distributors to report end product sales 
to processors much more frequently than monthly. This is a positive 
trend which FNS supports insofar as it should result in improved 
transparency and coordination. However, not all distributors are 
currently capable of meeting that requirement. Therefore, this language 
will not be included in the final rule.
    Two commenters were opposed to requiring agreements between 
processors and distributors. One of these commenters noted that some of 
the required topics in the agreements, such as financial liability, 
reporting frequency, and value pass through method are already the 
responsibility of the processor via the National Processing Agreement 
or regulations and that that may diminish the usefulness of the 
agreements between processors and distributors. This commenter also 
stated a concern that State agencies may create additional burdensome 
requirements for these agreements that may discourage processor and 
distributor participation. The required topics are only intended to be 
a starting point. Processors and distributors may include additional 
provisions that more accurately reflect their interests or business 
model. State agencies must be able to add requirements to reflect State 
laws or the status of the market within their State. The second of 
these commenters requested that agreements between processors and 
distributors be encouraged as opposed to required. Requiring these 
agreements will ensure more communication, transparency, and 
cooperation between processors and distributors. This provision was 
widely supported in other comments. Thus, the proposed language is 
retained without change in this final rule.
    In Sec.  250.30(j), we proposed to permit all agreements between a 
distributing, subdistributing, or recipient agency and a processor to 
be up to five years in duration, as opposed to the current one year 
limit with an option to extend for two additional years. This proposal 
would permit the appropriate agency to determine the length of 
agreement that would be to its best advantage, within the five-year 
limitation, and would reduce the time and labor burden imposed on such 
agencies. We proposed to make National Processing Agreements permanent. 
We proposed that amendments to any agreements may be made as needed 
(e.g., when new subcontractors are added), with the concurrence of the 
parties to the

[[Page 18919]]

agreement, and that such amendments would be effective for the duration 
of the agreement, unless otherwise indicated.
    One commenter requested that all agreements, including the State 
Participation, In-State Processing, and Recipient Agency Processing 
Agreements are made permanent. In-State and Recipient Agency Processing 
Agreements are sometimes subject to frequent updates and are often 
executed in conjunction with a procurement action. Therefore, the 
proposed five year duration limit is retained in this final rule for 
In-State and Recipient Agency Processing Agreements. However, State 
Participation Agreements are designed to allow State agencies to 
supplement requirements in the National Processing Agreement for multi-
State processors. Therefore, the final rule is amended to allow State 
agencies to make their State Participation Agreements permanent. 
Amendments to State Participation Agreements should still be made when 
needed, for example, to approve subcontractors arrangements or approve 
end products to be sold in the State.
    We proposed to remove the following requirements or statements in 
current Sec.  250.30 related to processing agreements, as they are 
overly restrictive or unnecessary given current practice and 
administrative structure:
     The requirement in current Sec.  250.30(c)(1) that the FNS 
Regional Office review processing agreements.
     The requirement in current Sec.  250.30(c)(3) that the 
agreement be prepared and reviewed by State legal staff to ensure 
conformance with Federal regulations.
     The requirement in current Sec.  250.30(l) that the 
distributing agency provide a copy of the 7 CFR part 250 regulations to 
processors and a copy of agreements to processors and the FNS Regional 
Office.
    No comments were received on these proposed removals. Thus, the 
proposed removals are retained without change in this final rule.
2. Procurement Requirements, Sec.  250.31
    The requirements for the procurement of goods and services under 
Federal grants are established in 2 CFR part 200 and USDA implementing 
regulations at 2 CFR part 400 and part 416, as applicable. In Sec.  
250.31(a), we proposed to indicate the applicability of these 
requirements to the procurement of processed end products, 
distribution, or of other processing services related to donated foods. 
We also proposed that distributing or recipient agencies may use 
procurement procedures that conform to applicable State and local laws, 
as appropriate, but must ensure compliance with the Federal procurement 
requirements. No comments were received on this provision. Thus, the 
proposed language is retained without change in this final rule.
    In Sec.  250.31(b), we proposed to require specific information in 
procurement documents, to assist recipient agencies in ensuring that 
they receive credit for the value of donated foods in finished end 
products. We proposed to require that procurement documents include the 
price to be charged for the finished end product or other processing 
service, the method of end product sales that would be utilized, an 
assurance that crediting for donated foods would be performed in 
accordance with the applicable requirements for such method of sales in 
proposed Sec.  250.36, the contract value of the donated food in the 
finished end products, and the location for the delivery of the 
finished end products. We proposed to remove current requirements for 
the provision of pricing information outside of the procurement 
process, including:
    (1) The requirement in current Sec.  250.30(c)(5)(ii) that pricing 
information be included with the end product data schedule; and
    (2) The requirements in current Sec.  250.30(d)(3) and (e)(2) that 
the processor provide pricing information summaries to the distributing 
agency, and the distributing agency provide such information to 
recipient agencies, as soon as possible after completion of the 
agreement.
    One commenter requested clarification on the applicability of these 
requirements to subsequent procurements conducted by a distributor 
acting as a recipient agency's authorized agent. The information 
required in procurement documents in this provision apply to all 
procurements for end products containing donated foods, regardless of 
who performed the procurement. The commenter also requested 
clarification that the requirement to include the value of the donated 
food in the end products in procurement documents does not remove the 
requirement to include the value of the donated food in the end 
products on the end product data schedule. This reflects an incorrect 
understanding of current requirements. The value of donated foods is no 
longer required on end product data schedules. Including the value on 
the end product data schedule would require it to be revised with every 
change in value. However, FNS publishes summary end product data 
schedules which include the value of donated food for each end product. 
The summary end product data schedules can be used to confirm the 
accuracy of the value of donated food listed in the procurement 
documents. Thus, the proposed language is retained without change in 
this final rule.
3. Protection of Donated Food Value, Sec.  250.32
    In Sec.  250.32(a), we proposed to include the requirement that the 
processor obtain financial protection to protect the value of donated 
foods prior to their delivery for processing, by means of a performance 
bond or irrevocable letter of credit. We proposed to remove escrow 
accounts as an option for financial protection. Multi-State processors 
must provide the performance bond or irrevocable letter of credit to 
FNS, in accordance with its National Processing Agreement. We proposed 
to clarify that the amount of the performance bond or letter of credit 
must be sufficient to cover at least 75 percent of the value of donated 
foods in the processor's physical or book inventory, as determined 
annually, and at the discretion of FNS, for processors under National 
Processing Agreements. For multi-State processors in their first year 
of participation in the processing program, the amount of the 
performance bond or letter of credit must be sufficient to cover 100 
percent of the value of donated foods, as determined annually, and at 
the discretion of FNS. In-State processors must provide the performance 
bond or letter of credit to the distributing or recipient agency, in 
accordance with its In-State or Recipient Agency Processing Agreement. 
No comments were received on this provision. Thus, the proposed 
language is retained without change in this final rule.
    In Sec.  250.32(b), we proposed to indicate the conditions under 
which the distributing or recipient agency must call in the performance 
bond or letter of credit. We also proposed to indicate that FNS would 
call in the performance bond or letter of credit under the same 
conditions and would ensure that any monies recovered by FNS are 
reimbursed to distributing agencies for losses of entitlement foods. No 
comments were received on this provision. Thus, the proposed language 
is retained without change in this final rule.
4. Ensuring Processing Yields of Donated Foods, Sec.  250.33
    In Sec.  250.33, we proposed to retain the required submission of 
the end product data schedule and to more specifically describe the 
required processing yields of donated food, which is currently

[[Page 18920]]

referred to as the yield. In Sec.  250.33(a), we proposed to require 
submission of the currently required information on the end product 
data schedule, with the exception of the price charged for the end 
product or other pricing information and the contract value of the 
donated food. As described above, in the proposed Sec.  250.31, pricing 
information must be included in the procurement of end products or 
other processing services relating to donated foods. Inclusion of such 
information on end product data schedules may be misleading, as it may 
lead some recipient agencies to conclude that a competitive procurement 
has been performed by the distributing agency under its In-State 
Processing Agreement or State Participation Agreement. Prices currently 
included on end product data schedules generally reflect the highest 
price that a processor would charge for the finished end product and 
not necessarily the actual price of the end product.
    We also proposed to require inclusion of the processing yield of 
donated food, which may be expressed as the quantity of donated food 
(pounds) needed to produce a specific quantity of end product or as the 
percentage of donated food returned in the finished end product. We 
proposed to retain the requirement that end product data schedules be 
approved by the distributing agency under In-State Processing 
Agreements. We proposed to clarify that the end product data schedules 
for products containing donated red meat or poultry must also be 
approved by the Department, as is currently required under program 
policy. We proposed to require that, under National Processing 
Agreements, end product data schedules be approved by the Department. 
Lastly, we proposed to clarify that an end product data schedule must 
be submitted in a standard electronic format dictated by FNS, and 
approved for each new end product that a processor wishes to provide or 
for a previously approved end product in which the ingredients or other 
pertinent information have been altered. No comments were received on 
this provision. Thus, the proposed language is retained without change 
in this final rule.
    In Sec.  250.33(b), we proposed to describe the different 
processing yields of donated foods that may be approved in end product 
data schedules. In an effort to simplify the yield requirements and 
streamline monitoring for distributing and recipient agencies we 
proposed to limit the processing yields to 100 percent yield, 
guaranteed yield, and standard yield. In Sec.  250.33(b)(1), we 
proposed to include the current 100 percent yield requirement. We 
proposed to indicate that FNS may make exceptions to the 100 percent 
yield requirement, on a case-by-case basis. Exceptions to the 100 
percent yield requirement can result in one of the alternate processing 
yields described below. Two commenters expressed support for the 
removal of guaranteed minimum yield. Thus, the proposed language is 
retained without change in this final rule.
    In Sec.  250.33(b)(2), we proposed to describe guaranteed yield. 
Under guaranteed yield, the processor must ensure that a specific 
quantity of end product would be produced from a specific quantity of 
donated food put into production. The guaranteed yield for a specific 
product is determined and agreed upon by the parties to the processing 
agreement, and, for In-State and Recipient Agency Processing 
Agreements, approved by the Department. Guaranteed yield is generally 
used when significant variance is present across processors in 
manufacturing and yield for a particular end product. The guaranteed 
yield must be indicated on the end product data schedule. One commenter 
requested clarification that a specific quantity of end product is 
tracked or reported as pounds of donated food per case of end product. 
This is correct. Thus, the final rule is amended to clarify.
    In Sec.  250.33(b)(3), we proposed to describe standard yield. 
Under standard yield, the processor must ensure that a specific 
quantity of end product, as determined by the Department, would be 
produced from a specific quantity of donated food. The standard yield 
is determined and applied uniformly by the Department to all processors 
for specific donated foods. The established standard yield is higher 
than the average yield under normal commercial production and serves to 
reward those processors that can process donated foods most 
efficiently. If necessary, the processor must use commercially 
purchased food of the same generic identity, of U.S. origin, and equal 
or better in all USDA procurement specifications than the donated food 
to provide the number of cases required to meet the standard yield to 
the distributing or recipient agency, as appropriate. The standard 
yield must be indicated on the end product data schedule. No comments 
were received on this provision. Thus, the proposed language is 
retained without change in this final rule.
    In Sec.  250.33(c), we proposed to require that the processor 
compensate the distributing or recipient agency, as appropriate, for 
the loss of donated foods, or for commercially purchased foods 
substituted for donated foods. Loss of donated foods may result for a 
number of reasons, including the processor's failure to meet the 
required processing yield or failure to produce end products that meet 
required specifications, spoilage or damage of donated foods in 
storage, or improper distribution of end products. In order to 
compensate for such losses of donated foods, we proposed to require 
that the processor:
    (1) Replace the lost donated food or commercial substitute with 
commercially purchased food of the same generic identity, of U.S. 
origin, and equal or better in all USDA procurement specifications than 
the donated food; or
    (2) Return end products that are wholesome but do not meet required 
specifications to production for processing into the requisite quantity 
of end products that meet the required specifications; or
    (3) Pay the distributing or recipient agency, as appropriate, for 
the replacement value of the donated food or commercial substitute only 
if the purchase of replacement foods is not feasible and the processor 
has received approval. In-State processors would be required to obtain 
distributing agency approval for such payment and multi-State 
processors would be required to obtain FNS approval.
    No comments were received on this provision. Thus, the proposed 
language is retained without change in this final rule.
    In Sec.  250.33(d), we proposed to retain the requirement that 
processors must credit the distributing or recipient agency, as 
appropriate, for the sale of any by-products resulting from the 
processing of donated foods or of commercially purchased foods 
substituted for donated foods. However, we proposed to require 
crediting through invoice reductions or another means of crediting. We 
also proposed to clarify that the processor must credit the appropriate 
agency for the net value received from the sale of by-products after 
subtraction of any documented expenses incurred in preparing the by-
product for sale. We proposed to remove the requirement in current 
Sec.  250.30(c)(5)(viii)(D) that the processor credit the distributing 
or recipient agency for the sale of donated food containers because the 
burden required to monitor the credit outweighed the value returned. 
One commenter requested clarification on the method of oversight to 
ensure that distributing or recipient agencies are credited for the

[[Page 18921]]

sale of by-products by processors. Verification that appropriate 
credits for the sale of by-products have occurred is required as part 
of the audits required of processors under current requirements at 
Sec.  250.20(b). Thus, the proposed language is retained without change 
in this final rule.
    In Sec.  250.33(e), we proposed to retain the requirements that 
processors must meet applicable Federal labeling requirements, and must 
follow the procedures required for approval of labels for end products 
that claim to meet meal pattern requirements in child nutrition 
programs. No comments were received on this provision. Thus, the 
proposed language is retained without change in this final rule.
5. Substitution of Donated Foods, Sec.  250.34
    In Sec.  250.34(a), we proposed to permit a processor to substitute 
any donated food that is delivered to it from a USDA vendor with 
commercially purchased food of the same generic identity, of U.S. 
origin, and of equal or better quality in all Departmental purchase 
specifications than the donated food. We proposed to clarify that 
commercially purchased beef, pork or poultry must meet the same 
specifications as donated product, including inspection, grading, 
testing, and humane handling standards, and must be approved by the 
Department in advance of substitution. We proposed to remove the 
required elements of a processor's plan for poultry substitution in 
current Sec.  250.30(f)(1)(ii)(B). We also proposed to allow a 
processor the option to substitute any donated food in advance of the 
receipt of the donated food shipment and to more clearly describe the 
processor's assumption of risk should the Department be unable to 
purchase and deliver any donated food so substituted. Lastly, we 
proposed to require that commercially purchased food substituted for 
donated food meet the same processing yield requirements that would be 
required for the donated food, as in the proposed Sec.  250.33. No 
comments were received on this provision. Thus, the proposed language 
is retained without change in this final rule.
    In Sec.  250.34(b), we proposed to prohibit substitution or 
commingling of all backhauled donated foods and to require that the 
processor, if amenable to reformulation, process such end products into 
end products for sale and delivery to the same recipient agency that 
provided them and not to any other recipient agency. In other words, 
the recipient agency which backhauls a previously processed end product 
to a processor for reformulation must in turn use the reformulated end 
products, containing their backhauled product, in their food service. 
Additionally, we proposed to prohibit the processor from providing 
payment to the recipient agency in lieu of processing and prohibit the 
distributing or recipient agency from transferring the backhauled food 
to another processor. No comments were received on this provision. 
Thus, the proposed language is retained without change in this final 
rule.
    In Sec.  250.34(c), we proposed to retain current requirements at 
Sec.  250.30(g), which state that the processing of donated beef, pork 
and poultry must occur under Federal Quality Assessment Division 
grading in order to assure that substitution and yield requirements are 
met and that end products conform with the applicable end product data 
schedule. The Department's Agricultural Marketing Service conducts such 
grading. The processor is responsible for paying the cost of the 
acceptance service grading. The processor must maintain records 
(including grading certificates) necessary to document that 
substitution of all donated foods has been conducted in accordance with 
the requirements in 7 CFR part 250. One commenter expressed that the 
financial burden of grading can be overwhelming for small processors. 
FNS recognizes that the cost of grading requirements is not 
insignificant to small processors. However, grading requirements are 
important for ensuring that Federal regulations are adhered to. 
Further, small processors are typically in-State processors and not 
multi-State processors and, when circumstances warrant it, State 
distributing agencies can waive grading requirements under In-State and 
Recipient Agency Processing Agreements, according to proposed Sec.  
250.34(d). Thus, the proposed language is retained without change in 
this final rule.
    In Sec.  250.34(d), we proposed to permit distributing agencies to 
approve a waiver of the grading requirement for donated beef, pork, or 
poultry under certain conditions. However, we proposed to indicate that 
such waivers may only be approved on a case by case basis--e.g., for a 
specific production run. The distributing agency may not approve a 
blanket waiver of the requirement. We also included the stipulation 
that a waiver may only be approved if the processor's past performance 
indicates that the quality of the end product would not be adversely 
affected. No comments were received on this provision. Thus, the 
proposed language is retained without change in this final rule.
    In Sec.  250.34(e), we proposed to include the current provision 
that the processor may use any substituted donated food in other 
processing activities conducted at its facilities. We proposed to 
remove the stipulation, in current Sec.  250.30(f)(4), that title to 
the substituted donated food passes to the processor upon the 
initiation of processing of the end product with the commercial 
substitute. The transfer of title to donated foods, which are part of 
the Federal grant, is limited to the distributing agency or recipient 
agency, as the recipients of the grant. Subsequent donated food 
activities may be performed in accordance with Federal regulations and 
the terms of processing agreements but would not include a further 
transfer of title. No comments were received on this provision. Thus, 
the proposed language is retained without change in this final rule.
6. Storage, Food Safety, Quality Control, and Inventory Management, 
Sec.  250.35
    In Sec.  250.35, we proposed to include requirements for the 
storage, food safety oversight, quality control, and inventory 
management of donated foods provided for processing. In Sec.  
250.35(a), we proposed to require the processor to ensure the safe and 
effective storage of donated foods, including compliance with the 
general storage requirements in current Sec.  250.12, and to maintain 
an effective quality control system at its processing facilities. We 
proposed to require the processor to maintain documentation to verify 
the effectiveness of its quality control system and to provide such 
documentation upon request. No comments were received on this 
provision. Thus, the proposed language is retained without change in 
this final rule.
    In Sec.  250.35(b), we proposed to require that all processing of 
donated foods is conducted in compliance with all Federal, State, and 
local requirements relative to food safety. This represents a 
simplification of current regulations. One commenter requested that the 
Agricultural Marketing Service (AMS) be explicitly listed along with 
Federal, State, and local requirements. AMS is only one of many Federal 
agencies with pertinent requirements that would be included in this 
list and applicable requirements will vary from processor to processor 
depending on the type of product produced, among other factors. Thus, 
the proposed language is retained without change in this final rule.
    In Sec.  250.35(c), we proposed to clarify that a processor may 
commingle

[[Page 18922]]

donated foods and commercially purchased foods, unless the processing 
agreement specifically stipulates that the donated foods must be used 
in processing, and not substituted, or the donated foods have been 
backhauled from a recipient agency. However, such commingling must be 
performed in a manner that ensures the safe and efficient use of 
donated foods, as well as compliance with substitution requirements, 
and with reporting of donated food inventories on performance reports, 
as required in 7 CFR part 250.
    We also proposed to require that processors ensure that commingling 
of finished end products with other food products by distributors 
results in the sale to recipient agencies of end products that meet 
substitution requirements. One way that this may be achieved is by 
affixing the applicable USDA certification stamp to the exterior 
shipping containers of such end products. No comments were received on 
this provision. Thus, the proposed language is retained without change 
in this final rule.
    In Sec.  250.35(d), we proposed to include the current limitation 
on inventories of donated foods at a processor and to clarify that 
distributing agencies are not permitted to submit food orders for 
processors reporting no sales activity during the prior year's contract 
period unless documentation is submitted by the processor which 
outlines specific plans for donated food drawdown, product promotion, 
or sales expansion. A processor may not have on hand more than a six-
month supply of donated foods, based on an average amount utilized for 
that period. However, the distributing agency may, at the processor's 
request, provide written approval to allow the processor to maintain a 
larger amount of donated foods in inventory if it determines that the 
processor may efficiently store and process such an amount. We also 
proposed to include an allowance for FNS to require an inventory 
transfer to another State distributing agency or processor when 
inventories are determined to be excessive for a State distributing 
agency or processor, i.e., more than six months on-hand or exceeding 
the established inventory protection, to ensure full utilization prior 
to the end of the school year.
    Many comments were received on this provision. One commenter 
requested clarification that the inventory limit was not based on the 
average usage over a six-month period. That is correct. The inventory 
limit is intended to be based on average usage for the year being 
evaluated. Thus, the final rule is amended to clarify.
    One commenter expressed concern that including a provision allowing 
FNS to transfer inventories to another State distributing agency or 
processor when inventories are determined to be excessive for a State 
distributing agency or processor will prevent a distributing agency 
from providing justification that accounts for the overage. This is not 
the intent of the proposed provision. Consistent with inventory 
transfers generally, inventory transfers due to excessive inventories 
will only occur after consultation with all the involved parties. The 
commenter also inquired whether advancements in technology and 
improvements in the Department's business practices will eventually 
eliminate the need for the six-month inventory limit. The Department 
consistently endeavors to improve our service and the technology with 
which stakeholders interface. However, elimination of the current 
inventory limits is not currently proposed. Thus, the proposed language 
is retained without change in this final rule
    One commenter requested that the six-month inventory limit be 
eliminated and that an annual three-month inventory carryover limit be 
imposed. Such a provision would require a separate rule and would be 
subject to public comment. Therefore, this language will not be 
included in the final rule.
    Fourteen commenters requested that language be included in this 
provision to establish the method by which the six-month inventory 
level is calculated. Additionally, the commenters requested that 
average monthly usage, which is used to determine the six-month 
inventory limit, be calculated using a ten month period as opposed to a 
twelve month period. The commenters felt that a ten month period more 
accurately reflects the average school year and the period during which 
products are delivered. Although the six-month inventory limit is 
contained in current regulations, the method by which it is calculated 
is prescribed in a Policy Memorandum (FD-064; dated March 20, 2012). 
FNS will consider the position of the commenters and determine whether 
to issue program policy to reflect this change. Thus, the proposed 
language is retained without change in this final rule.
    In Sec.  250.35(e), we proposed to clarify that the distributing 
agency may permit the processor to carry over donated foods in excess 
of allowed levels into the next year of its agreement, if the 
distributing agency determines that the processor may efficiently 
process such foods. We also proposed to include the distributing 
agency's current option to direct the processor to transfer or re-
donate such donated foods to another distributing or recipient agency 
or processor. Lastly, we proposed to clarify that, if these options are 
not practical, the distributing agency must require the processor to 
pay for the donated foods held in excess of allowed levels in an amount 
equal to the replacement value of the donated foods. No comments were 
received on this provision. Thus, the proposed language is retained 
without change in this final rule.
    In Sec.  250.35(f), we proposed to expand the current options for 
the disposition of substitutable donated foods at the termination of an 
agreement to all donated foods, in accordance with our proposal in the 
proposed Sec.  250.34 to permit substitution of all donated foods. We 
proposed to clarify that the disposition of donated foods may include a 
transfer; i.e., the distributing agency may permit a transfer of 
donated foods to another State distributing agency, with FNS approval, 
in accordance with current Sec.  250.12(e). We also proposed to permit 
the transfer of commercially purchased foods that meet the substitution 
requirements in the proposed Sec.  250.34 in place of the donated 
foods. We proposed to permit the processor to pay the distributing or 
recipient agency, as appropriate, for the donated foods only if 
returning or transferring the donated foods or commercially purchasing 
food that meets the substitution requirements is not feasible and if 
FNS approval has been granted. We proposed to include the current 
requirement that the processor pay the cost of transporting any donated 
foods when the agreement is terminated at the processor's request or as 
a result of the processor's failure to comply with the requirements of 
7 CFR part 250. One commenter requested that the higher value not be 
used between the contract value and replacement value when processors 
pay the distributing or recipient agency under Sec.  250.35(f)(3). 
However, FNS wants to ensure that distributing and recipient agencies 
are made whole in these situations. Thus, the proposed language is 
retained without change in this final rule.
7. End Product Sales and Crediting for the Value of Donated Foods, 
Sec.  250.36
    In Sec.  250.36, we proposed to describe the methods of end product 
sales. A processor must sell end products to recipient agencies under a 
system that assures such agencies receive credit or ``value pass 
through'' for the contract value of donated food contained in the

[[Page 18923]]

end product. Processors must also ensure that, when end products are 
provided to commercial distributors for sale and delivery to recipient 
agencies, such sales occur under a system that provides such agencies 
with a credit for the contract value of donated food contained in the 
end product. In Sec.  250.36(a), we proposed to require that the sales 
of end products, either directly by the processor or through a 
commercial distributor, be performed utilizing one of the methods of 
end product sales contained in this section, to ensure that the 
distributing or recipient agency, as appropriate, receives credit for 
the value of donated foods contained in end products. We also proposed 
to require that all systems of sales utilized must provide clear 
documentation of crediting for the value of the donated foods contained 
in the end products. One commenter requested that language be added to 
this provision that clarifies that method of end product sales is 
synonymous with value pass through system. Thus, the final rule is 
amended to clarify.
    In Sec.  250.36(b), we proposed to permit end product sales through 
a refund or rebate system, in which the processor or distributor sells 
end products to the distributing or recipient agency, as appropriate, 
at the commercial or gross price, and provides the appropriate agency 
with a refund for the contract value of donated foods contained in the 
end products. We proposed to require the processor to remit the refund 
to the distributing or recipient agency, as appropriate, within 30 days 
of receiving a request for a refund from the appropriate agency. We 
proposed to clarify that the refund request must be in writing but may 
be transmitted via email or other electronic means. No comments were 
received on this provision. Thus, the proposed language is retained 
without change in this final rule.
    In Sec.  250.36(c), we proposed to permit end product sales through 
a discount system, in which the processor sells end products at a net 
price that provides a discount from the commercial case price for the 
value of the donated foods contained in the end products. We proposed 
to refer to this system as a direct discount system to distinguish it 
from the method of end product sales described in the following 
paragraph. One commenter requested that the word ``provides'' be 
replaced with ``incorporates'' to clarify the provision. Thus, the 
final rule is amended to clarify.
    In Sec.  250.36(d), we proposed to permit end product sales through 
a net price that provides a discount from the commercial case price for 
the value of the donated foods contained in the end products. The 
processor then compensates the distributor for the discount provided 
for the value of the donated food in its sale of end products. We 
proposed to refer to it as an indirect discount system. We proposed to 
require the processor to ensure that the distributor notify it of such 
sales, at least on a monthly basis, through automated sales reports or 
other submissions. Fifteen commenters requested that the term ``net off 
invoice'' be incorporated into the provision to refer to the practice 
as it is commonly known. Thus, the final rule is amended to clarify. 
Twelve commenters requested that language be included in the provision 
to encourage recipient agencies to closely monitor invoices to ensure 
correct discounts are applied. Thus, the final rule is amended to 
clarify. One commenter requested that the word ``provides'' be replaced 
with ``incorporates'' to clarify the provision. Thus, the final rule is 
amended to clarify. One commenter requested that the frequency at which 
distributors must report end product sales to processors be increased 
from at least monthly to weekly. Not all distributors are currently 
capable of meeting that requirement. Moreover, such a provision would 
require a separate rule and would be subject to public comment. 
Therefore, this language will not be included in the final rule.
    In Sec.  250.36(e), we proposed to permit end product sales through 
a fee-for-service system, which includes all costs to produce the end 
product minus the value of the donated food put into production. The 
processor must identify any charge for delivery of end products 
separately from the fee-for-service on its invoice. One commenter 
requested clarification on how a processor would know a distributor's 
delivery charge in order to identify it separately on its invoice. If 
the delivery charge is listed on the processor's invoice, the processor 
may have procured the services of the distributor to store and/or 
deliver the product to the recipient. Therefore, the delivery charge 
would be known by the processor. If the processor did not procure the 
services of the distributor, the processor can request that the 
distributor directly bill the recipient agency for the distributor's 
services. Thus, the proposed language is retained without change in 
this final rule. Thirteen commenters requested that this provision be 
expanded to identify three distinct variations of fee-for-service. The 
commenters' preferred breakdown is: (1) Direct shipment and invoicing 
from the processor to the recipient agency; (2) Fee-for-service through 
a distributor, where the processor ships multiple pallets of product to 
a distributor with a breakout of who owns what products; and (3) What 
is commonly known as Modified Fee-for-service, when the recipient 
agency has an authorized agent bill them for the total case price. 
Thus, the final rule is amended to clarify.
    In Sec.  250.36(f), we proposed that the processor and distributor 
may sell end products to the distributing or recipient agency under an 
alternate method of end product sales that is approved by FNS and the 
distributing agency. Such alternate methods of sale must ensure that 
the distributing or recipient agency, as appropriate, receives credit 
for the value of donated foods contained in the end products. No 
comments were received on this provision. Thus, the proposed language 
is retained without change in this final rule.
    In Sec.  250.36(g), we proposed to clarify that the contract value 
of the donated foods must be used in crediting for donated foods in end 
product sales and to refer to the definition of contract value included 
in current Sec.  250.2. No comments were received on this provision. 
Thus, the proposed language is retained without change in this final 
rule.
    In Sec.  250.36(h), we proposed to require that the distributing 
agency provide the processor with a list of recipient agencies eligible 
to purchase end products along with the quantity of raw donated food 
that is to be delivered to the processor for processing on behalf of 
each recipient agency. This is intended to ensure that only eligible 
recipient agencies receive end products and that those end products are 
received only in the amounts for which they are eligible. For end 
products sold through distributors, we proposed to require that the 
processor provide the distributor with a list of eligible recipient 
agencies and either the quantities of approved end products that each 
recipient agency is eligible to receive or the quantity of donated food 
allocated to each recipient agency along with the raw donated food 
(pounds or cases) needed per case of each approved end product. One 
commenter expressed concern that this provision has the potential for 
abuse by processors because it may provide them with information that 
can be used for marketing and that it may impact deliveries for direct 
delivery donated foods. Processors and distributors must know which 
recipient agencies are eligible to receive end products containing 
donated foods to ensure that only eligible recipient agencies receive

[[Page 18924]]

such products. FNS believes that processors will use this provision to 
promote the use of processed end products by recipient agencies but not 
to a degree that could be seen as abuse. Thus, the proposed language is 
retained without change in this final rule.
8. Reports, Records, and Reviews of Processor Performance, Sec.  250.37
    In Sec.  250.37, we proposed to include the reporting and 
recordkeeping requirements for the processing of donated foods, and the 
use of such reports and records to review processor performance. In 
current Sec.  250.30(m), the processor must submit a monthly 
performance report to the distributing agency, including the following 
information for the reporting period, with year-to-date totals:
    (1) A list of all eligible recipient agencies receiving end 
products;
    (2) The quantity of donated foods on hand at the beginning of the 
reporting period;
    (3) The quantity of donated foods received;
    (4) The quantity of donated foods transferred to the processor from 
another entity, or transferred by the processor to another entity;
    (5) The quantity of end products delivered to each eligible 
recipient agency; and
    (6) The quantity of donated foods remaining at the end of the 
reporting period.
    In Sec.  250.37(a), we proposed to retain the requirement that the 
processor submit the performance report to the distributing agency (or 
to the recipient agency, in accordance with a Recipient Agency 
Processing Agreement) on a monthly basis. We proposed to retain all of 
the currently required information in the report. We proposed to 
require the processor to also include quantities of donated food 
losses, and grading certificates and other documentation, as requested 
by the distributing agency, to support the information included in the 
performance reports. Such documentation may include, for example, bills 
of lading, invoices or copies of refund payments to verify sales and 
delivery of end products to recipient agencies. We proposed to retain 
the current deadlines for the submission of performance reports in the 
proposed Sec.  250.37(a). Twelve commenters requested that the 
additional month for reporting year-end transactions be removed from 
the provision. The commenters felt that the advanced tracking methods 
instituted with improved technology permits processors to complete the 
necessary tasks without additional time and that this will assist state 
agencies in expediting the analysis of processor inventory. Thus, the 
final rule is amended accordingly. The commenters also requested 
clarification that a processor can stop reporting on a given USDA Food 
to a state agency for products with a beginning balance of zero and by 
which there have been no receipts, adjustments, or shipments of end 
products for that USDA Foods code. This is a correct interpretation. 
FNS will explore policy guidance to provide clarification on this 
issue.
    In Sec.  250.37(b), we proposed to require that the processor must 
include reductions in donated food inventories on monthly performance 
reports only after sales of end products have been made or after sales 
of end products through distributors have been documented. We proposed 
to require that, when a distributor sells end products under a refund 
system, such documentation must be through the distributing or 
recipient agency's request for a refund (under a refund system) or 
through the distributor's automated sales reports or other electronic 
or written submission (under an indirect discount system or under fee-
for-service). No comments were received on this provision. However, FNS 
received many comments on the proposed provision at Sec.  250.11(e) and 
language was included in Sec.  250.37(b) of this final rule to clarify 
the impact of that provision.
    In Sec.  250.37(c), we proposed to require that a multi-State 
processor submit a summary performance report to FNS, on a monthly 
basis and in a standard format established by FNS, containing 
information from the performance report that would allow FNS to track 
the processor's total and State-by-State donated food inventories. The 
purpose of this report is to assess the amount of the performance bond 
or letter of credit required of the processor under its National 
Processing Agreement. However, each distributing agency would still be 
responsible for monitoring the multi-State processor's inventory of 
donated foods received for processing in the respective State, in 
accordance with the proposed Sec.  250.37(a). No comments were received 
on this provision. Thus, the proposed language is retained without 
change in this final rule.
    In Sec.  250.37(d), we proposed to require processors to maintain 
specific records to demonstrate compliance with processing requirements 
in 7 CFR part 250, including, for example, assurance of receipt of 
donated food shipments, production, sale, and delivery of end products, 
and crediting for donated foods contained in end products. No comments 
were received on this provision. Thus, the proposed language is 
retained without change in this final rule.
    In Sec.  250.37(e), we proposed to require distributing agencies to 
maintain specific records to demonstrate compliance with processing 
requirements in 7 CFR part 250, including, for example, end product 
data schedules, performance reports, copies of audits, and 
documentation of the correction of any deficiencies identified in such 
audits. No comments were received on this provision. Thus, the proposed 
language is retained without change in this final rule.
    In Sec.  250.37(f), we proposed to require that recipient agencies 
maintain specific records to demonstrate compliance with processing 
requirements in 7 CFR part 250, including, for example, the receipt of 
end products purchased from processors or distributors, crediting for 
the value of donated foods included in end products, and procurement 
documents. No comments were received on this provision. Thus, the 
proposed language is retained without change in this final rule.
    In Sec.  250.37(g), we proposed to clarify the review requirements 
for the distributing agency including the review of performance reports 
to ensure that the processor:
    (1) Receives donated food shipments, as applicable;
    (2) Delivers end products to eligible recipient agencies, in the 
types and quantities for which they are eligible;
    (3) Meets the required processing yields for donated foods; and
    (4) Accurately reports donated food inventory activity and 
maintains inventories within approved levels.
    No comments were received on this provision. Thus, the proposed 
language is retained without change in this final rule.
    We proposed to remove the requirements in current Sec.  
250.30(m)(2) and (n)(2) relating to the submission of reports and the 
performance of reviews to ensure that substitution of concentrated skim 
milk for donated nonfat dry milk is in compliance with requirements. 
Donated nonfat dry milk is no longer available for donation to schools. 
No comments were received on this removal. Thus, the proposed removal 
is retained without change in this final rule.
9. Provisions of Agreements, Sec.  250.38
    In Sec.  250.38, we proposed the required provisions for each type 
of processing agreement included in the proposed Sec.  250.30, to 
ensure compliance with the

[[Page 18925]]

requirements in 7 CFR part 250. In Sec.  250.38(a), we proposed to 
establish that the National Processing Agreement is inclusive of all 
provisions necessary to ensure that a multi-State processor complies 
with all applicable requirements relating to the processing of donated 
foods. FNS has developed a prototype National Processing Agreement that 
includes all such required provisions. No comments were received on 
this provision. Thus, the proposed language is retained without change 
in this final rule.
    In Sec.  250.38(b), we proposed to require that the State 
Participation Agreement with a multi-State processor contain specific 
provisions or attachments to assure compliance with requirements in 7 
CFR part 250 that are not included in the multi-State processor's 
National Processing Agreement. Such provisions include, for example, a 
list of recipient agencies eligible to receive end products, summary 
end product data schedules that contain a list of end products that may 
be sold in the State, a requirement that processors enter into a 
written agreement with distributors handling end products containing 
donated foods, and the allowed method(s) of end product sales 
implemented by the distributing agency. One commenter requested 
clarification that physical processor to processor transfers are not 
included in the term backhauled in Sec.  250.38(b)(5). The commenter is 
correct that physical processor to processor transfers are not included 
in the term backhaul. The term backhauling is defined in the proposed 
Sec.  250.2 to only include distributing or recipient agency origin. 
Thus, the proposed language is retained without change in this final 
rule.
    In Sec.  250.38(c), we proposed to require that the In-State 
Processing Agreement contain specific provisions or attachments to 
assure compliance with requirements in 7 CFR part 250, including 
assurance that the processor will meet processing yields for donated 
foods and substitution requirements, report donated food inventory 
activity and maintain inventories within approved levels, enter into a 
written agreement with distributors handling end products containing 
donated foods, credit recipient agencies for the value of all donated 
foods contained in end products, and obtain required audits. One 
commenter requested clarification on which party is responsible for 
holding the bond or irrevocable letter of credit for donated foods at 
the subcontractor of an in-State processor under the proposed Sec.  
250.38(c)(4). The distributing agency has discretion under an In-State 
Processing Agreement, including discretion in determining which party 
holds the bond or irrevocable letter of credit for donated foods at the 
subcontractor of an in-State processor. Thus, the proposed language is 
retained without change in this final rule.
    In Sec.  250.38(d), we proposed to require that the Recipient 
Agency Processing Agreement contain the same provisions as an In-State 
Processing Agreement, to the extent that the distributing agency 
permits the recipient to perform activities normally performed by the 
distributing agency under an In-State Processing Agreement (e.g., 
approval of end product data schedules or review of performance 
reports). However, a list of recipient agencies eligible to receive end 
products need not be included unless the Recipient Agency Processing 
Agreement represents more than one (e.g., a cooperative) recipient 
agency. No comments were received on this provision. Thus, the proposed 
language is retained without change in this final rule.
    In Sec.  250.38(e), we proposed to prohibit a distributing or 
recipient agency, as appropriate, from extending or renewing an 
agreement when a processor has not complied with processing 
requirements. We proposed to allow a distributing or recipient agency 
to immediately terminate an agreement in the event of such 
noncompliance. One commenter expressed concern that requiring an agency 
to terminate or not renew an agreement can cause hardship for either 
agency. The commenter felt that this should be at the discretion of the 
agency as extenuating circumstances may apply and processors may be 
able to rectify their issues and provide sufficient service the 
following year. Thus, the final rule is amended to allow distributing 
and recipient agencies discretion in determining whether or not to 
extend or renew agreements when a processor has not complied with 
processing requirements. However, these decisions will be evaluated by 
FNS during reviews of distributing and recipient agencies to ensure 
compliance with processing requirements.
10. Miscellaneous Provisions, Sec.  250.39
    In Sec.  250.39(a), we proposed that FNS may waive any of the 
requirements in 7 CFR part 250 for the purpose of conducting 
demonstration projects to test program changes which might improve 
processing of donated foods. No comments were received on this 
provision. Thus, the proposed language is retained without change in 
this final rule.
    In Sec.  250.39(b), we proposed to require the distributing agency 
to develop and provide a processing manual or similar materials to 
processors and other parties to ensure sufficient guidance is given 
regarding the requirements for the processing of donated foods.
    Consistent with the current demonstration project, the distributing 
agency would be permitted to provide additional information relating to 
State-specific processing procedures upon request. No comments were 
received on this provision. Thus, the proposed language is retained 
without change in this final rule.
    In Sec.  250.39(c), we proposed to clarify that guidance or 
information relating to the processing of donated foods is included on 
the FNS website or may otherwise be obtained from FNS. Such guidance 
and information includes program regulations and policies, the FNS 
Audit Guide, and the USDA National Processing Agreement. No comments 
were received on this provision. Thus, the proposed language is 
retained without change in this final rule.

III. Procedural Matters

A. Executive Orders 12866, 13563, and 13771

    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. Executive Order 13771 directs agencies to reduce 
regulation and control regulatory costs and provides that for every one 
new regulation issued, at least two prior regulations be identified for 
elimination, and that the cost of planned regulations be prudently 
managed and controlled through a budgeting process.
    This final rule has been determined to be not significant and was 
not reviewed by the Office of Management and Budget (OMB) in 
conformance with Executive Order 12866. FNS considers this rule to be 
an Executive Order 13771 deregulatory action.

B. Regulatory Impact Analysis

    This rule has been designated as not significant by the Office of 
Management and Budget, therefore, no Regulatory Impact Analysis is 
required.

[[Page 18926]]

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601-612) requires Agencies 
to analyze the impact of rulemaking on small entities and consider 
alternatives that would minimize any significant impacts on a 
substantial number of small entities. Pursuant to that review, the 
Administrator of FNS has certified that this rule would not have a 
significant impact on a substantial number of small entities.

D. Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public 
Law 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 
Department generally must prepare a written statement, including a cost 
benefit analysis, for proposed and final rules with ``Federal 
mandates'' that may result in expenditures by State, local or Tribal 
governments, in the aggregate, or 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 Department to identify 
and consider a reasonable number of regulatory alternatives and adopt 
the most cost effective or least burdensome alternative that achieves 
the objectives of the rule.
    This final rule does not contain 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, the rule is not subject to the requirements of sections 
202 and 205 of the UMRA.

E. Executive Order 12372

    The donation of foods in USDA food distribution and child nutrition 
programs is included in the Catalog of Federal Domestic Assistance 
under 10.555, 10.558, 10.559, 10.565, 10.567, and 10.569 is subject to 
Executive Order 12372, which requires intergovernmental consultation 
with State and local officials. (See 2 CFR chapter IV)

F. Federalism Summary Impact Statement

    Executive Order 13132 requires Federal agencies to consider the 
impact of their regulatory actions on State and local governments. 
Where such actions have federalism implications, agencies are directed 
to provide a statement for inclusion in the preamble to the regulations 
describing the agency's considerations in terms of the three categories 
called for under Section (6)(b)(2)(B) of Executive Order 13121.
    The Department has considered the impact of this rule on State and 
local governments and has determined that this rule does not have 
federalism implications. Therefore, under section 6(b) of the Executive 
Order, a federalism summary is not required.

G. Civil Rights Impact Analysis

    FNS has reviewed this final rule in accordance with USDA Regulation 
4300-4, ``Civil Rights Impact Analysis,'' to identify any major civil 
rights impacts the rule might have on program participants on the basis 
of age, race, color, national origin, sex or disability. After a 
careful review of the rule's intent and provisions, FNS has determined 
that this rule would not in any way limit or reduce the ability of 
participants to receive the benefits of donated foods in food 
distribution or child nutrition programs on the basis of an 
individual's or group's race, color, national origin, sex, age, or 
disability. FNS found no factors that would negatively and 
disproportionately affect any group of individuals.

H. Executive Order 13175

    Executive Order 13175 requires Federal agencies to consult and 
coordinate with Tribes on a government-to-government basis on policies 
that have Tribal implications, including regulations, legislative 
comments or proposed legislation, and other policy statements or 
actions that have substantial direct effects on one or more Indian 
Tribes, on the relationship between the Federal Government and Indian 
Tribes, or on the distribution of power and responsibilities between 
the Federal Government and Indian Tribes. FNS consulted with Tribes on 
this proposed rule on November 19, 2014; however, no concerns or 
comments were received. We are unaware of any current Tribal laws that 
could conflict with the final rule.

I. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. Chap. 35) requires 
the Office of Management and Budget (OMB) to approve all collections of 
information by a Federal agency before they can be implemented. 
Respondents are not required to respond to any collection of 
information unless it displays a current, valid OMB control number. No 
changes have been made to the proposed information collection 
requirements in this final rulemaking. Thus, in accordance with the 
Paperwork Reduction Act of 1995, the information collection 
requirements associated with this final rule, which were filed under 
0584-0293, have been submitted for approval to OMB. When OMB notifies 
FNS of its decision, FNS will publish a notice in the Federal Register 
of the action.

J. E-Government Act Compliance

    The Department is committed to complying with the E-Government Act, 
to promote the use of the internet and other information technologies 
to provide increased opportunities for citizen access to Government 
information and services, and for other purposes.

List of Subjects in 7 CFR Part 250

    Administrative practice and procedure, Food assistance programs, 
Grant programs, Reporting and recordkeeping requirements, Social 
programs, Surplus agricultural commodities.
    Accordingly, 7 CFR part 250 is amended as follows:

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

0
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.

0
2. In Sec.  250.2:
0
a. Remove definitions of Contracting agency and Fee-for-service.
0
b. Add definitions in alphabetical order for Backhauling, Commingling, 
End product data schedule, In-State Processing Agreement, National 
Processing Agreement, Recipient Agency Processing Agreement, 
Replacement value, and State Participation Agreement.
    The additions read as follows:


Sec.  250.2  Definitions.

* * * * *
    Backhauling means the delivery of donated foods to a processor for 
processing from a distributing or recipient agency's storage facility.
* * * * *
    Commingling means the storage of donated foods together with 
commercially purchased foods.
* * * * *
    End product data schedule means a processor's description of its 
processing of donated food into a finished end

[[Page 18927]]

product, including the processing yield of donated food.
* * * * *
    In-State Processing Agreement means a distributing agency's 
agreement with an in-State processor to process donated foods into 
finished end products for sale to eligible recipient agencies or for 
sale to the distributing agency.
* * * * *
    National Processing Agreement means an agreement between FNS and a 
multi-State processor to process donated foods into end products for 
sale to distributing or recipient agencies.
* * * * *
    Recipient Agency Processing Agreement means a recipient agency's 
agreement with a processor to process donated foods and to purchase the 
finished end products.
* * * * *
    Replacement value means the price assigned by the Department to a 
donated food which must reflect the current price in the market to 
ensure compensation for donated foods lost in processing or other 
activities. The replacement value may be changed by the Department at 
any time.
* * * * *
    State Participation Agreement means a distributing agency's 
agreement with a multi-State processor to permit the sale of finished 
end products produced under the processor's National Processing 
Agreement to eligible recipient agencies in the State or to directly 
purchase such finished end products.
* * * * *

0
3. In Sec.  250.11, revise paragraph (e) to read as follows:


Sec.  250.11  Delivery and receipt of donated food shipments.

* * * * *
    (e) Transfer of title. In general, title to donated foods transfers 
to the distributing agency or recipient agency, as appropriate, upon 
acceptance of the donated foods at the time and place of delivery. 
Title to donated foods provided to a multi-State processor, in 
accordance with its National Processing Agreement, transfers to the 
distributing agency or recipient agency, as appropriate, upon 
acceptance of the finished end products at the time and place of 
delivery. However, when a recipient agency has contracted with a 
distributor to act as an authorized agent, title to finished end 
products containing donated foods transfers to the recipient agency 
upon delivery and acceptance by the contracted distributor. 
Notwithstanding transfer of title, distributing and recipient agencies 
must ensure compliance with the requirements of this part in the 
distribution, control, and use of donated foods.

0
4. In Sec.  250.18, revise paragraph (b) to read as follows:


Sec.  250.18  Reporting requirements.

* * * * *
    (b) Processor performance. Processors must submit performance 
reports and other supporting documentation, as required by the 
distributing agency or by FNS, in accordance with Sec.  250.37(a), to 
ensure compliance with requirements in this part.
* * * * *

0
5. In Sec.  250.19, revise paragraph (a) to read as follows:


Sec.  250.19  Recordkeeping requirements.

    (a) Required records. Distributing agencies, recipient agencies, 
processors, and other entities must maintain records of agreements and 
contracts, reports, audits, and claim actions, funds obtained as an 
incident of donated food distribution, and other records specifically 
required in this part or in other Departmental regulations, as 
applicable. In addition, distributing agencies must keep a record of 
the value of donated foods each of its school food authorities 
receives, in accordance with Sec.  250.58(e), and records to 
demonstrate compliance with the professional standards for distributing 
agency directors established in Sec.  235.11(g) of this chapter. 
Processors must also maintain records documenting the sale of end 
products to recipient agencies, including the sale of such end products 
by distributors, and must submit monthly performance reports, in 
accordance with subpart C of this part and with any other recordkeeping 
requirements included in their agreements. Specific recordkeeping 
requirements relating to the use of donated foods in contracts with 
food service management companies are included in Sec.  250.54. Failure 
of the distributing agency, recipient agency, processor, or other 
entity to comply with recordkeeping requirements must be considered 
prima facie evidence of improper distribution or loss of donated foods 
and may result in a claim against such party for the loss or misuse of 
donated foods, in accordance with Sec.  250.16, or in other sanctions 
or corrective actions.
* * * * *

0
6. Revise Subpart C to read as follows:
Subpart C--Processing of Donated Foods
Sec.
250.30 Processing of donated foods into end products.
250.31 Procurement requirements.
250.32 Protection of donated food value.
250.33 Ensuring processing yields of donated foods.
250.34 Substitution of donated foods.
250.35 Storage, food safety, quality control, and inventory 
management.
250.36 End product sales and crediting for the value of donated 
foods.
250.37 Reports, records, and reviews of processor performance.
250.38 Provisions of agreements.
250.39 Miscellaneous provisions.

Subpart C--Processing of Donated Foods


Sec.  250.30  Processing of donated foods into end products.

    (a) Purpose of processing donated foods. Donated foods are most 
commonly provided to processors to process into approved end products 
for use in school lunch programs or other food services provided by 
recipient agencies. The ability to divert donated foods for processing 
provides recipient agencies with more options for using donated foods 
in their programs. For example, donated foods such as whole chickens or 
chicken parts may be processed into precooked grilled chicken strips 
for use in the National School Lunch Program. In some cases, donated 
foods are provided to processors to prepare meals or for repackaging. 
Use of a commercial facility to repackage donated foods, or to use 
donated foods in the preparation of meals, is considered processing in 
this part.
    (b) Agreement requirement. The processing of donated foods must be 
performed in accordance with an agreement between the processor and 
FNS, between the processor and the distributing agency, or, if allowed 
by the distributing agency, between the processor and a recipient 
agency or subdistributing agency. However, a processing agreement will 
not obligate any party to provide donated foods to a processor for 
processing. The agreements described below are required in addition to, 
not in lieu of, competitively procured contracts required in accordance 
with Sec.  250.31. The processing agreement must be signed by an 
authorized individual for the processor. The different types of 
processing agreements are described in this section.
    (c) National Processing Agreement. A multi-State processor must 
enter into a National Processing Agreement with FNS in order to process 
donated foods into end products in accordance with end product data 
schedules approved by FNS. FNS also holds and manages such processor's 
performance bond or letter

[[Page 18928]]

of credit under its National Processing Agreement, in accordance with 
Sec.  250.32. FNS does not itself procure or purchase end products 
under a National Processing Agreement. A multi-State processor must 
also enter into a State Participation Agreement with the distributing 
agency in order to sell nationally approved end products in the State, 
in accordance with paragraph (d) of this section.
    (d) State Participation Agreement. The distributing agency must 
enter into a State Participation Agreement with a multi-State processor 
to permit the sale of end products produced under the processor's 
National Processing Agreement to eligible recipient agencies in the 
State or to directly purchase such end products. The distributing 
agency may include other State-specific processing requirements in its 
State Participation Agreement, such as the methods of end product sales 
permitted, in accordance with Sec.  250.36, or the use of labels 
attesting to fulfillment of meal pattern requirements in child 
nutrition programs. The distributing agency must utilize the following 
criteria in its selection of processors with which it enters into 
agreements. These criteria will be reviewed by the appropriate FNS 
Regional Office during the management evaluation review of the 
distributing agency.
    (1) The nutritional contribution provided by end products;
    (2) The marketability or acceptability of end products;
    (3) The means by which end products will be distributed;
    (4) Price competitiveness of end products and processing yields of 
donated foods;
    (5) Any applicable labeling requirements; and
    (6) The processor's record of ethics and integrity, and capacity to 
meet regulatory requirements.
    (e) In-State Processing Agreement. A distributing agency must enter 
into an In-State Processing Agreement with an in-State processor to 
process donated foods into finished end products, unless it permits 
recipient agencies to enter into Recipient Agency Processing Agreements 
for such purpose, in accordance with paragraph (f) of this section. 
Under an In-State Processing Agreement, the distributing agency 
approves end product data schedules (except red meat and poultry) 
submitted by the processor, holds and manages the processor's 
performance bond or letter of credit, in accordance with Sec.  250.32, 
and assures compliance with other processing requirements. The 
distributing agency may also purchase the finished end products for 
distribution to eligible recipient agencies in the State under an In-
State Processing Agreement, or may permit recipient agencies to 
purchase such end products, in accordance with applicable procurement 
requirements. In the latter case, the In-State Processing Agreement is 
often called a ``master agreement.'' A distributing agency that 
procures end products on behalf of recipient agencies, or that limits 
recipient agencies' access to the procurement of specific end products 
through its master agreements, must utilize the following criteria in 
its selection of processors with which it enters into agreements. These 
criteria will be reviewed by the appropriate FNS Regional Office during 
the management evaluation review of the distributing agency.
    (1) The nutritional contribution provided by end products;
    (2) The marketability or acceptability of end products;
    (3) The means by which end products will be distributed;
    (4) Price competitiveness of end products and processing yields of 
donated foods;
    (5) Any applicable labeling requirements; and
    (6) The processor's record of ethics and integrity, and capacity to 
meet regulatory requirements.
    (f) Recipient Agency Processing Agreement. The distributing agency 
may permit a recipient agency to enter into an agreement with an in-
State processor to process donated foods and to purchase the finished 
end products in accordance with a Recipient Agency Processing 
Agreement. A recipient agency may also enter into a Recipient Agency 
Processing Agreement on behalf of other recipient agencies, in 
accordance with an agreement between the parties. The distributing 
agency may also delegate a recipient agency to approve end product data 
schedules or select nationally approved end product data schedules, 
review in-State processor performance reports, manage the performance 
bond or letter of credit of an in-State processor, and monitor other 
processing activities under a Recipient Agency Processing Agreement. 
All such activities must be performed in accordance with the 
requirements of this part. All Recipient Agency Processing Agreements 
must be reviewed and approved by the distributing agency. All recipient 
agencies must utilize the following criteria in its selection of 
processors with which it enters into agreements:
    (1) The nutritional contribution provided by end products;
    (2) The marketability or acceptability of end products;
    (3) The means by which end products will be distributed;
    (4) Price competitiveness of end products and processing yields of 
donated foods;
    (5) Any applicable labeling requirements; and
    (6) The processor's record of ethics and integrity, and capacity to 
meet regulatory requirements.
    (g) Ensuring acceptability of end products. A distributing agency 
that procures end products on behalf of recipient agencies, or that 
otherwise limits recipient agencies' access to the procurement of 
specific end products, must provide for testing of end products to 
ensure their acceptability by recipient agencies, prior to entering 
into processing agreements. End products that have previously been 
tested, or that are otherwise determined to be acceptable, need not be 
tested. However, such a distributing agency must monitor product 
acceptability on an ongoing basis.
    (h) Prohibition against subcontracting. A processor may not assign 
any processing activities under its processing agreement or subcontract 
to another entity to perform any aspect of processing, without the 
specific written consent of the other party to the agreement (i.e., 
distributing or recipient agency, or FNS, as appropriate). The 
distributing agency may, for example, provide the required consent as 
part of its State Participation Agreement or In-State Processing 
Agreement with the processor.
    (i) Agreements between processors and distributors. A processor 
providing end products containing donated foods to a distributor must 
enter into a written agreement with the distributor. The agreement must 
reference, at a minimum, the financial liability (i.e., who must pay) 
for the replacement value of donated foods, not less than monthly end 
product sales reporting frequency, requirements under Sec.  250.11, and 
the applicable value pass through system to ensure that the value of 
donated foods and finished end products are properly credited to 
recipient agencies. Distributing agencies can set additional 
requirements.
    (j) Duration of agreements. In-State Processing Agreements and 
Recipient Agency Processing Agreements may be up to five years in 
duration. State Participation Agreements may be permanent. National 
Processing Agreements are permanent. Amendments to any agreements may 
be made, as needed, with the concurrence of both parties to the 
agreement. Such amendments will be effective for the

[[Page 18929]]

duration of the agreement, unless otherwise indicated.


Sec.  250.31  Procurement requirements.

    (a) Applicability of Federal procurement requirements. Distributing 
and recipient agencies must comply with the requirements in 2 CFR part 
200 and part 400, as applicable, in purchasing end products, 
distribution, or other processing services from processors. 
Distributing and recipient agencies may use procurement procedures that 
conform to applicable State or local laws and regulations, but must 
ensure compliance with the procurement requirements in 2 CFR part 200 
and part 400, as applicable.
    (b) Required information in procurement documents. In all 
procurements of processed end products containing USDA donated foods, 
procurement documents must include the following information:
    (1) The price to be charged for the end product or other processing 
service;
    (2) The method of end product sales that will be utilized and 
assurance that crediting for donated foods will be performed in 
accordance with the applicable requirements for such method of sales in 
Sec.  250.36;
    (3) The value of the donated food in the end products; and
    (4) The location for the delivery of the end products.


Sec.  250.32  Protection of donated food value.

    (a) Performance bond or irrevocable letter of credit. The processor 
must obtain a performance bond or an irrevocable letter of credit to 
protect the value of donated foods to be received for processing prior 
to the delivery of the donated foods to the processor. The processor 
must provide the performance bond or letter of credit to the 
distributing or recipient agency, in accordance with its In-State or 
Recipient Agency Processing Agreement. However, a multi-State processor 
must provide the performance bond or letter of credit to FNS, in 
accordance with its National Processing Agreement. For multi-State 
processors, the minimum amount of the performance bond or letter of 
credit must be sufficient to cover at least 75 percent of the value of 
donated foods in the processor's physical or book inventory, as 
determined annually and at the discretion of FNS for processors under 
National Processing Agreements. For multi-state processors in their 
first year of participation in the processing program, the amount of 
the performance bond or letter of credit must be sufficient to cover 
100 percent of the value of donated foods, as determined annually, and 
at the discretion of FNS. The surety company from which a bond is 
obtained must be listed in the most current Department of Treasury's 
Listing of Approved Sureties (Department Circular 570).
    (b) Calling in the performance bond or letter of credit. The 
distributing or recipient agency must call in the performance bond or 
letter of credit whenever a processor's lack of compliance with this 
part, or with the terms of the In-State or Recipient Agency Processing 
Agreement, results in a loss of donated foods to a distributing or 
recipient agency and the processor fails to make restitution or respond 
to a claim action initiated to recover the loss. Similarly, FNS will 
call in the performance bond or letter of credit in the same 
circumstances, in accordance with National Processing Agreements, and 
will ensure that any monies recovered are reimbursed to distributing 
agencies for losses of entitlement foods.


Sec.  250.33  Ensuring processing yields of donated foods.

    (a) End product data schedules. The processor must submit an end 
product data schedule, in a standard electronic format dictated by FNS, 
for approval before it may process donated foods into end products. For 
In-State Processing Agreements, the end product data schedule must be 
approved by the distributing agency and, for products containing 
donated red meat and poultry, the end product data schedule must also 
be approved by the Department. For National Processing Agreements, the 
end product data schedule must be approved by the Department. An end 
product data schedule must be submitted, and approved, for each new end 
product that a processor wishes to provide or for a previously approved 
end product in which the ingredients (or other pertinent information) 
have been altered. On the end product data schedule, the processor must 
describe its processing of donated food into an end product, including 
the following information:
    (1) A description of the end product;
    (2) The types and quantities of donated foods included;
    (3) The types and quantities of other ingredients included;
    (4) The quantity of end product produced; and
    (5) The processing yield of donated food, which may be expressed as 
the quantity (pounds or cases) of donated food needed to produce a 
specific quantity of end product or as the percentage of raw donated 
food versus the quantity returned in the finished end product.
    (b) Processing yields of donated foods. All end products must have 
a processing yield of donated foods associated with its production and 
this processing yield must be indicated on its end product data 
schedule. The processing yield options are limited to 100 percent 
yield, guaranteed yield, and standard yield.
    (1) Under 100 percent yield, the processor must ensure that 100 
percent of the raw donated food is returned in the finished end 
product. The processor must replace any processing loss of donated food 
with commercially purchased food of the same generic identity, of U.S. 
origin, and equal or better in all USDA procurement specifications than 
the donated food. The processor must demonstrate such replacement by 
reporting reductions in donated food inventories on performance reports 
by the amount of donated food contained in the finished end product 
rather than the amount that went into production. The Department may 
approve an exception if a processor experiences a significant 
manufacturing loss.
    (2) Under guaranteed yield, the processor must ensure that a 
specific quantity of end product (i.e., number of cases) will be 
produced from a specific quantity of donated food (i.e., pounds), as 
determined by the parties to the processing agreement, and, for In-
State Processing Agreements, approved by the Department. If necessary, 
the processor must use commercially purchased food of the same generic 
identity, of U.S. origin, and equal or better in all USDA procurement 
specifications than the donated food to provide the guaranteed number 
of cases of end product to the distributing or recipient agency, as 
appropriate. The guaranteed yield must be indicated on the end product 
data schedule.
    (3) Under standard yield, the processor must ensure that a specific 
quantity of end product (i.e., number of cases), as determined by the 
Department, will be produced from a specific quantity of donated food. 
The established standard yield is higher than the yield the processor 
could achieve under normal commercial production and serves to reward 
those processors that can process donated foods most efficiently. If 
necessary, the processor must use commercially purchased food of the 
same generic identity, of U.S. origin, and equal or better in all USDA 
procurement specifications than the donated food to provide the number 
of cases required to meet the standard yield to the distributing or 
recipient

[[Page 18930]]

agency, as appropriate. The standard yield must be indicated on the end 
product data schedule.
    (c) Compensation for loss of donated foods. The processor must 
compensate the distributing or recipient agency, as appropriate, for 
the loss of donated foods, or for the loss of commercially purchased 
foods substituted for donated foods. Such loss may occur, for example, 
if the processor fails to meet the required processing yield of donated 
food or fails to produce end products that meet required 
specifications, if donated foods are spoiled, damaged, or otherwise 
adulterated at a processing facility, or if end products are improperly 
distributed. To compensate for such loss, the processor must:
    (1) Replace the lost donated food or commercial substitute with 
commercially purchased food of the same generic identity, of U.S. 
origin, and equal or better in all USDA procurement specifications than 
the donated food; or
    (2) Return end products that are wholesome but do not meet required 
specifications to production for processing into the requisite quantity 
of end products that meet the required specifications (commonly called 
rework products); or
    (3) If the purchase of replacement foods or the reprocessing of 
products that do not meet the required specifications is not feasible, 
the processor may, with FNS, distributing agency, or recipient agency 
approval, dependent on which entity maintains the agreement with the 
processor, pay the distributing or recipient agency, as appropriate, 
for the replacement value of the donated food or commercial substitute.
    (d) Credit for sale of by-products. The processor must credit the 
distributing or recipient agency, as appropriate, for the sale of any 
by-products produced in the processing of donated foods. The processor 
must credit for the net value of such sale, or the market value of the 
by-products, after subtraction of any documented expenses incurred in 
preparing the by-product for sale. Crediting must be achieved through 
invoice reduction or by another means of crediting.
    (e) Labeling requirements. The processor must ensure that all end 
product labels meet Federal labeling requirements. A processor that 
claims end products fulfill meal pattern requirements in child 
nutrition programs must comply with the procedures required for 
approval of labels of such end products.


Sec.  250.34  Substitution of donated foods.

    (a) Substitution of commercially purchased foods for donated foods. 
Unless its agreement specifically stipulates that the donated foods 
must be used in processing, the processor may substitute commercially 
purchased foods for donated foods that are delivered to it from a USDA 
vendor. The commercially purchased food must be of the same generic 
identity, of U.S. origin, and equal or better in all USDA procurement 
specifications than the donated food. Commercially purchased beef, 
pork, or poultry must meet the same specifications as donated product, 
including inspection, grading, testing, and humane handling standards 
and must be approved by the Department in advance of substitution. The 
processor may choose to make the substitution before the actual receipt 
of the donated food. However, the processor assumes all risk and 
liability if, due to changing market conditions or other reasons, the 
Department's purchase of donated foods and their delivery to the 
processor is not feasible. Commercially purchased food substituted for 
donated food must meet the same processing yield requirements in Sec.  
250.33 that would be required for the donated food.
    (b) Prohibition against substitution and other requirements for 
backhauled donated foods. The processor may not substitute or commingle 
donated foods that are backhauled to it from a distributing or 
recipient agency's storage facility. The processor must process 
backhauled donated foods into end products for sale and delivery to the 
distributing or recipient agency that provided them and not to any 
other agency. Distributing or recipient agencies must purchase end 
products utilizing donated foods backhauled to their contracted 
processor. The processor may not provide payment for backhauled donated 
foods in lieu of processing.
    (c) Grading requirements. The processing of donated beef, pork, and 
poultry must occur under Federal Quality Assessment Division grading, 
which is conducted by the Department's Agricultural Marketing Service. 
Federal Quality Assessment Division grading ensures that processing is 
conducted in compliance with substitution and yield requirements and in 
conformance with the end product data schedule. The processor is 
responsible for paying the cost of acceptance service grading. The 
processor must maintain grading certificates and other records 
necessary to document compliance with requirements for substitution of 
donated foods and with other requirements of this subpart.
    (d) Waiver of grading requirements. The distributing agency may 
waive the grading requirement for donated beef, pork or poultry in 
accordance with one of the conditions listed in this paragraph (d). 
However, grading may only be waived on a case by case basis (e.g., for 
a particular production run); the distributing agency may not approve a 
blanket waiver of the requirement. Additionally, a waiver may only be 
granted if a processor's past performance indicates that the quality of 
the end product will not be adversely affected. The conditions for 
granting a waiver include:
    (1) That even with ample notification time, the processor cannot 
secure the services of a grader;
    (2) The cost of the grader's service in relation to the value of 
donated beef, pork or poultry being processed would be excessive; or
    (3) The distributing or recipient agency's urgent need for the 
product leaves insufficient time to secure the services of a grader.
    (e) Use of substituted donated foods. The processor may use donated 
foods that have been substituted with commercially purchased foods in 
other processing activities conducted at its facilities.


Sec.  250.35  Storage, food safety, quality control, and inventory 
management.

    (a) Storage and quality control. The processor must ensure the safe 
and effective storage of donated foods, including compliance with the 
general storage requirements in Sec.  250.12, and must maintain an 
effective quality control system at its processing facilities. The 
processor must maintain documentation to verify the effectiveness of 
its quality control system and must provide such documentation upon 
request.
    (b) Food safety requirements. The processor must ensure that all 
processing of donated foods is conducted in compliance with all 
Federal, State, and local requirements relative to food safety.
    (c) Commingling of donated foods and commercially purchased foods. 
The processor may commingle donated foods and commercially purchased 
foods, unless the processing agreement specifically stipulates that the 
donated foods must be used in processing, and not substituted, or the 
donated foods have been backhauled from a recipient agency. However, 
such commingling must be performed in a manner that ensures the safe 
and efficient use of donated foods, as well as compliance

[[Page 18931]]

with substitution requirements in Sec.  250.34 and with reporting of 
donated food inventories on performance reports, as required in Sec.  
250.37. The processor must also ensure that commingling of processed 
end products and other food products, either at its facility or at the 
facility of a commercial distributor, ensures the sale and delivery of 
end products that meet the processing requirements in this subpart--
e.g., by affixing the applicable USDA certification stamp to the 
exterior shipping containers of such end products.
    (d) Limitation on donated food inventories. Inventories of donated 
food at processors may not be in excess of a six-month supply, based on 
an average amount of donated foods utilized, unless a higher level has 
been specifically approved by the distributing agency on the basis of a 
written justification submitted by the processor. Distributing agencies 
are not permitted to submit food orders for processors reporting no 
sales activity during the prior year's contract period unless 
documentation is submitted by the processor which outlines specific 
plans for donated food drawdown, product promotion, or sales expansion. 
When inventories are determined to be excessive for a State or 
processor, e.g., more than six months or exceeding the established 
protection, FNS may require the transfer of inventory and/or 
entitlement to another State or processor to ensure utilization prior 
to the end of the school year.
    (e) Reconciliation of excess donated food inventories. If, at the 
end of the school year, the processor has donated food inventories in 
excess of a six-month supply, the distributing agency may, in 
accordance with paragraph (d) of this section, permit the processor to 
carry over such excess inventory into the next year of its agreement, 
if it determines that the processor may efficiently store and process 
such quantity of donated foods. The distributing agency may also direct 
the processor to transfer such donated foods to other recipient 
agencies, or to transfer them to other distributing agencies, in 
accordance with Sec.  250.12(e). However, if these actions are not 
practical, the distributing agency must require the processor to pay it 
for the donated foods held in excess of allowed levels at the 
replacement value of the donated foods.
    (f) Disposition of donated food inventories upon agreement 
termination. When an agreement terminates, and is not extended or 
renewed, the processor must take one of the actions indicated in this 
paragraph (f) with respect to remaining donated food inventories, as 
directed by the distributing agency or recipient agency, as 
appropriate. The processor must pay the cost of transporting any 
donated foods when the agreement is terminated at the processor's 
request or as a result of the processor's failure to comply with the 
requirements of this part. The processor must:
    (1) Return the donated foods, or commercially purchased foods that 
meet the substitution requirements in Sec.  250.34, to the distributing 
or recipient agency, as appropriate; or
    (2) Transfer the donated foods, or commercially purchased foods 
that meet the substitution requirements in Sec.  250.34, to another 
distributing or recipient agency with which it has a processing 
agreement; or
    (3) If returning or transferring the donated foods, or commercially 
purchased foods that meet the substitution requirements in Sec.  
250.34, is not feasible, the processor may, with FNS approval, pay the 
distributing or recipient agency, as appropriate, for the donated 
foods, at the contract value or replacement value of the donated foods, 
whichever is higher.


Sec.  250.36  End product sales and crediting for the value of donated 
foods.

    (a) Methods of end product sales. To ensure that the distributing 
or recipient agency, as appropriate, receives credit for the value of 
donated foods contained in end products, the sale of end products must 
be performed using one of the methods of end product sales, also known 
as value pass through systems, described in this section. All systems 
of sales utilized must provide clear documentation of crediting for the 
value of the donated foods contained in the end products.
    (b) Refund or rebate. Under this system, the processor sells end 
products to the distributing or recipient agency, as appropriate, at 
the commercial, or gross, price and must provide a refund or rebate for 
the value of the donated food contained in the end products. The 
processor may also deliver end products to a commercial distributor for 
sale to distributing or recipient agencies under this system. In both 
cases, the processor must provide a refund to the appropriate agency 
within 30 days of receiving a request for a refund from that agency. 
The refund request must be in writing, which may be transmitted via 
email or other electronic submission.
    (c) Direct discount. Under this system, the processor must sell end 
products to the distributing or recipient agency, as appropriate, at a 
net price that incorporates a discount from the commercial case price 
for the value of donated food contained in the end products.
    (d) Indirect discount. Under this system, also known as net off 
invoice, the processor delivers end products to a commercial 
distributor, which must sell the end products to an eligible 
distributing or recipient agency, as appropriate, at a net price that 
incorporates a discount from the commercial case price for the value of 
donated food contained in the end products. The processor must require 
the distributor to notify it of such sales, at least on a monthly 
basis, through automated sales reports or other electronic or written 
submission. The processor then compensates the distributor for the 
discount provided for the value of the donated food in its sale of end 
products. Recipient agencies should closely monitor invoices to ensure 
correct discounts are applied.
    (e) Fee-for-service. (1) Under this system, the processor must sell 
end products to the distributing or recipient agency, as appropriate, 
at a fee-for-service, which includes all costs to produce the end 
products not including the value of the donated food used in 
production. Three basic types of fee-for-service are used:
    (i) Direct shipment and invoicing from the processor to the 
recipient agency;
    (ii) Fee-for-service through a distributor, where the processor 
ships multiple pallets of product to a distributor with a breakout of 
who owns what products; and
    (iii) What is commonly known as Modified Fee-for-service, when the 
recipient agency has an authorized agent bill them for the total case 
price.
    (2) The processor must identify any charge for delivery of end 
products separately from the fee-for-service on its invoice. If the 
processor provides end products sold under fee-for-service to a 
distributor for delivery to the distributing or recipient agency, the 
processor must identify the distributor's delivery charge separately 
from the fee-for-service on its invoice to the appropriate agency or 
may permit the distributor to bill the agency separately for the 
delivery of end products. The processor must require that the 
distributor notify it of such sales, at least on a monthly basis, 
through automated sales reports, email, or other electronic or written 
submission. When the recipient agency procures storage and distribution 
of processed end products separately from the processing of donated 
foods, the recipient agency may provide the distributor written 
approval to act as the recipient agency's

[[Page 18932]]

authorized agent for the total case price (i.e., including the fee-for-
service and the delivery charge), in accordance with Sec.  250.11(e).
    (f) Approved alternative method. The processor or distributor may 
sell end products under an alternative method approved by FNS and the 
distributing agency that ensures crediting for the value of donated 
foods contained in the end products.
    (g) Donated food value used in crediting. In crediting for the 
value of donated foods in end product sales, the contract value of the 
donated foods, as defined in Sec.  250.2, must be used.
    (h) Ensuring sale and delivery of end products to eligible 
recipient agencies. In order to ensure the sale of end products to 
eligible recipient agencies, the distributing agency must provide the 
processor with a list of recipient agencies eligible to purchase end 
products, along with the quantity of raw donated food that is to be 
delivered to the processor for processing on behalf of each recipient 
agency. In order to ensure that the distributor sells end products only 
to eligible recipient agencies, the processor must provide the 
distributor with a list of eligible recipient agencies and either:
    (1) The quantities of approved end products that each recipient 
agency is eligible to receive; or
    (2) The quantity of donated food allocated to each recipient agency 
and the raw donated food (pounds or cases) needed per case of each 
approved end product.


Sec.  250.37  Reports, records, and reviews of processor performance.

    (a) Performance reports. The processor must submit a performance 
report to the distributing agency (or to the recipient agency, in 
accordance with a Recipient Agency Processing Agreement) on a monthly 
basis, which must include the information listed in this paragraph (a). 
Performance reports must be submitted not later than 30 days after the 
end of the reporting period. The performance report must include the 
following information for the reporting period, with year-to-date 
totals:
    (1) A list of all recipient agencies purchasing end products;
    (2) The quantity of donated foods in inventory at the beginning of 
the reporting period;
    (3) The quantity of donated foods received;
    (4) The quantity of donated foods transferred to the processor from 
another entity, or transferred by the processor to another entity;
    (5) The quantity of donated foods losses;
    (6) The quantity of end products delivered to each eligible 
recipient agency;
    (7) The quantity of donated foods remaining at the end of the 
reporting period;
    (8) A certification statement that sufficient donated foods are in 
inventory or on order to account for the quantities needed for 
production of end products;
    (9) Grading certificates, as applicable; and
    (10) Other supporting documentation, as required by the 
distributing agency or recipient agency.
    (b) Reporting reductions in donated food inventories. The processor 
must report reductions in donated food inventories on performance 
reports only after sales of end products have been made, or after sales 
of end products through distributors have been documented. However, 
when a recipient agency has contracted with a distributor to act as an 
authorized agent, the processor may report reductions in donated food 
inventories upon delivery and acceptance by the contracted distributor, 
in accordance with Sec.  250.11(e). Documentation of distributor sales 
must be through the distributing or recipient agency's request for a 
refund (under a refund or rebate system) or through receipt of the 
distributor's automated sales reports or other electronic or written 
reports submitted to the processor (under an indirect discount system 
or under a fee-for-service system).
    (c) Summary performance report. Along with the submission of 
performance reports to the distributing agency, a multi-State processor 
must submit a summary performance report to FNS, on a monthly basis and 
in a format established by FNS, in accordance with its National 
Processing Agreement. The summary report must include an accounting of 
the processor's national inventory of donated foods, including the 
information listed in this paragraph (c). The report must be submitted 
not later than 30 days after the end of the reporting period; however, 
the final performance report must be submitted within 60 days of the 
end of the reporting period. The summary performance report must 
include the following information for the reporting period:
    (1) The total donated food inventory by State and the national 
total at the beginning of the reporting period;
    (2) The total quantity of donated food received by State, with 
year-to-date totals, and the national total of donated food received;
    (3) The total quantity of donated food reduced from inventory by 
State, with year-to-date totals, and the national total of donated 
foods reduced from inventory; and
    (4) The total quantity of donated foods remaining in inventory by 
State, and the national total, at the end of the reporting period.
    (d) Recordkeeping requirements for processors. The processor must 
maintain the following records relating to the processing of donated 
foods:
    (1) End product data schedules and summary end product data 
schedules, as applicable;
    (2) Receipt of donated foods shipments;
    (3) Production, sale, and delivery of end products, including sales 
through distributors;
    (4) All agreements with distributors;
    (5) Remittance of refunds, invoices, or other records that assure 
crediting for donated foods in end products and for sale of byproducts;
    (6) Documentation of Federal or State inspection of processing 
facilities, as appropriate, and of the maintenance of an effective 
quality control system;
    (7) Documentation of substitution of commercial foods for donated 
foods, including grading certificates, as applicable;
    (8) Waivers of grading requirements, as applicable; and
    (9) Required reports.
    (e) Recordkeeping requirements for the distributing agency. The 
distributing agency must maintain the following records relating to the 
processing of donated foods:
    (1) In-State Processing Agreements and State Participation 
Agreements;
    (2) End product data schedules or summary end product data 
schedules, as applicable;
    (3) Performance reports;
    (4) Grading certificates, as applicable;
    (5) Documentation that supports information on the performance 
report, as required by the distributing agency (e.g., sales invoices or 
copies of refund payments);
    (6) Copies of audits of in-State processors and documentation of 
the correction of any deficiencies identified in such audits;
    (7) The receipt of end products, as applicable; and
    (8) Procurement documents, as applicable.
    (f) Recordkeeping requirements for the recipient agency. The 
recipient agency must maintain the following records relating to the 
processing of donated foods:

[[Page 18933]]

    (1) The receipt of end products purchased from processors or 
distributors;
    (2) Crediting for the value of donated foods contained in end 
products;
    (3) Recipient Agency Processing Agreements, as applicable, and, in 
accordance with such agreements, other records included in paragraph 
(e) of this section, if not retained by the distributing agency; and
    (4) Procurement documents, as applicable.
    (g) Review requirements for the distributing agency. The 
distributing agency must review performance reports and other records 
that it must maintain, in accordance with the requirements in paragraph 
(e) of this section, to ensure that the processor:
    (1) Receives donated food shipments;
    (2) Delivers end products to eligible recipient agencies, in the 
types and quantities for which they are eligible;
    (3) Meets the required processing yields for donated foods; and
    (4) Accurately reports donated food inventory activity and 
maintains inventories within approved levels.


Sec.  250.38  Provisions of agreements.

    (a) National Processing Agreement. A National Processing Agreement 
includes provisions to ensure that a multi-State processor complies 
with all of the applicable requirements in this part relating to the 
processing of donated foods.
    (b) Required provisions for State Participation Agreement. A State 
Participation Agreement with a multi-State processor must include the 
following provisions:
    (1) Contact information for all appropriate parties to the 
agreement;
    (2) The effective dates of the agreement;
    (3) A list of recipient agencies eligible to receive end products;
    (4) Summary end product data schedules, with end products that may 
be sold in the State;
    (5) Assurance that the processor will not substitute or commingle 
backhauled donated foods and will provide end products processed from 
such donated foods only to the distributing or recipient agency from 
which the foods were received;
    (6) Any applicable labeling requirements;
    (7) Other processing requirements implemented by the distributing 
agency, such as the specific method(s) of end product sales permitted;
    (8) A statement that the agreement may be terminated by either 
party upon 30 days' written notice;
    (9) A statement that the agreement may be terminated immediately if 
the processor has not complied with its terms and conditions; and
    (10) A statement requiring the processor to enter into an agreement 
with any and all distributors delivering processed end products to 
recipient agencies that ensures adequate data sharing, reporting, and 
crediting of donated foods, in accordance with Sec.  250.30(i).
    (c) Required provisions of the In-State Processing Agreement. An 
In-State Processing Agreement must include the following provisions or 
attachments:
    (1) Contact information for all appropriate parties to the 
agreement;
    (2) The effective dates of the agreement;
    (3) A list of recipient agencies eligible to receive end products, 
as applicable;
    (4) In the event that subcontracting is allowed, the specific 
activities that will be performed under subcontracts;
    (5) Assurance that the processor will provide a performance bond or 
irrevocable letter of credit to protect the value of donated foods it 
is expected to maintain in inventory, in accordance with Sec.  250.32;
    (6) End product data schedules for all end products, with all 
required information, in accordance with Sec.  250.33(a);
    (7) Assurance that the processor will meet processing yields for 
donated foods, in accordance with Sec.  250.33;
    (8) Assurance that the processor will compensate the distributing 
or recipient agency, as appropriate, for any loss of donated foods, in 
accordance with Sec.  250.33(c);
    (9) Any applicable labeling requirements;
    (10) Assurance that the processor will meet requirements for the 
substitution of commercially purchased foods for donated foods, 
including grading requirements, in accordance with Sec.  250.34;
    (11) Assurance that the processor will not substitute or commingle 
backhauled donated foods and will provide end products processed from 
such donated foods only to the recipient agency from which the foods 
were received, as applicable;
    (12) Assurance that the processor will provide for the safe and 
effective storage of donated foods, meet inspection requirements, and 
maintain an effective quality control system at its processing 
facilities;
    (13) Assurance that the processor will report donated food 
inventory activity and maintain inventories within approved levels;
    (14) Assurance that the processor will return, transfer, or pay 
for, donated food inventories remaining upon termination of the 
agreement, in accordance with Sec.  250.35(f);
    (15) The specific method(s) of end product sales permitted, in 
accordance with Sec.  250.36;
    (16) Assurance that the processor will credit recipient agencies 
for the value of all donated foods, in accordance with Sec.  250.36;
    (17) Assurance that the processor will submit performance reports 
and meet other reporting and recordkeeping requirements, in accordance 
with Sec.  250.37;
    (18) Assurance that the processor will obtain independent CPA 
audits and will correct any deficiencies identified in such audits, in 
accordance with Sec.  250.20;
    (19) A statement that the distributing agency, subdistributing 
agency, or recipient agency, the Comptroller General, the Department of 
Agriculture, or their duly authorized representatives, may perform on-
site reviews of the processor's operation to ensure that all activities 
relating to donated foods are performed in accordance with the 
requirements in 7 CFR part 250;
    (20) A statement that the agreement may be terminated by either 
party upon 30 days' written notice;
    (21) A statement that the agreement may be terminated immediately 
if the processor has not complied with its terms and conditions;
    (22) A statement that extensions or renewals of the agreement, if 
applicable, are contingent upon the fulfillment of all agreement 
provisions; and
    (23) A statement requiring the processor to enter into an agreement 
with any and all distributors delivering processed end products to 
recipient agencies that ensures adequate data sharing, reporting, and 
crediting of donated foods, in accordance with Sec.  250.30(i).
    (d) Required provisions for Recipient Agency Processing Agreement. 
The Recipient Agency Processing Agreement must contain the same 
provisions as an In-State Processing Agreement, to the extent that the 
distributing agency permits the recipient agency to perform activities 
normally performed by the distributing agency under an In-State 
Processing Agreement (e.g., approval of end product data schedules, 
review of performance reports, or management of the performance bond). 
However, a list of recipient agencies eligible to receive end products 
need not be included unless the Recipient Agency Processing Agreement 
represents more than one (e.g., a cooperative) recipient agency.
    (e) Noncompliance with processing requirements. If the processor 
has not complied with processing requirements,

[[Page 18934]]

the distributing or recipient agency, as appropriate, may choose to not 
extend or renew the agreement and may immediately terminate it.


Sec.  250.39  Miscellaneous provisions.

    (a) Waiver of processing requirements. The Food and Nutrition 
Service may waive any of the requirements contained in this part for 
the purpose of conducting demonstration projects to test program 
changes designed to improve the processing of donated foods.
    (b) Processing activity guidance. Distributing agencies must 
develop and provide a processing manual or similar procedural material 
for guidance to contracting agencies, recipient agencies, and 
processors. Distributing agencies must revise these materials as 
necessary to reflect policy and regulatory changes. This guidance 
material must be provided to contracting agencies, recipient agencies, 
and processors at the time of the approval of the initial agreement by 
the distributing agency, when there have been regulatory or policy 
changes which necessitate changes in the guidance materials, and upon 
request. The manual must include, at a minimum, statements of the 
distributing agency's policies and procedures regarding:
    (1) Contract approval;
    (2) Monitoring and review of processing activities;
    (3) Recordkeeping and reporting requirements;
    (4) Inventory controls; and
    (5) Refund applications.
    (c) Guidance or information. Guidance or information relating to 
the processing of donated foods is included on the FNS website or may 
otherwise be obtained from FNS.

     Dated: March 30, 2018.
Brandon Lipps,
Administrator, Food and Nutrition Service.
[FR Doc. 2018-09168 Filed 4-30-18; 8:45 am]
BILLING CODE 3410-30-P