Federally Donated Meat and Poultry: Information on Extent and Impact of
States' Restrictions on Processors (Letter Report, 08/29/96,
GAO/RCED-96-220).

Pursuant to a legislative requirement, GAO reviewed the incidence and
effect of states restricting commercial processors from combining
federally donated meat or poultry from multiple sources for processing,
focusing on the: (1) reasons for and extent of states' and school
districts' batching restrictions; (2) impact that batching restrictions
have on commercial processors, schools, and the federal government; and
(3) mechanisms that state agencies and schools use to ensure compliance
with batching restrictions.

GAO found that: (1) states and schools impose batching restrictions to
prevent deteriorated taste from meat and poultry that have been stored
too long or improperly; (2) 46 of 54 state agencies that distribute
federally donated meat and poultry have contracts with commercial
processors that receive products from several states; (3) 28 of these
agencies have batching restrictions in their contracts, but processors
can request waivers from batching restrictions under certain
circumstances; (4) most multistate processors say that batching
restrictions do not significantly increase their costs or decrease
yields because batching is not the standard processing procedure for
some processors; (5) batching is not an issue for poultry products,
since poultry is usually processed to a finished form by its producer
before shipment; (6) a few multistate processors believe that failure to
obtain waivers from batching restrictions limits their ability to
operate at full capacity and increases costs; (7) processors usually
absorb the higher operating costs that result from batching restrictions
and do not pass them directly on to the schools; (8) batching
restrictions have no effect on the federal government, since they occur
after transfer of ownership; and (9) state agencies and schools rely on
on-site Agricultural Marketing Service graders, periodic independent
audits, and Department of Agriculture Inspector General reviews to
ensure compliance with their batching restrictions.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-96-220
     TITLE:  Federally Donated Meat and Poultry: Information on Extent 
             and Impact of States' Restrictions on Processors
      DATE:  08/29/96
   SUBJECT:  Meat inspection
             Poultry inspection
             Food services contracts
             State and local procurement
             Food programs for children
             Public schools
             Meat packing industry
             Contract specifications
             Waivers
             Contract monitoring
IDENTIFIER:  National School Lunch Program
             
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Cover
================================================================ COVER


Report to Congressional Committees

August 1996

FEDERALLY DONATED MEAT AND POULTRY
- INFORMATION ON EXTENT AND IMPACT
OF STATES' RESTRICTIONS ON
PROCESSORS

GAO/RCED-96-220

Federally Donated Meat and Poultry

(150257)


Abbreviations
=============================================================== ABBREV

  AMS -
  FCS -
  USDA -

Letter
=============================================================== LETTER


B-272562

August 29, 1996

Congressional Committees

Each year, the U.S.  Department of Agriculture (USDA) purchases and
donates hundreds of millions of dollars' worth of agricultural
commodities, including meat and poultry, to support various domestic
food assistance programs.  Over half of the donated agricultural
commodities go to food assistance programs for children, the largest
of which is the National School Lunch Program.  Schools receive the
donated meat and poultry in a finished product form, such as
hamburger patties, whole turkeys, chicken nuggets, or bulk
"fine-ground" beef, and either use the product immediately to prepare
lunches or store it for future use.  At a later date, a state or
school may decide to send some of the fine-ground beef to a
commercial processor to further process it into products such as
barbecue-flavored hamburgers or meatballs.  The commercial processor,
often located out of state, could receive similar orders to process
donated meat from another state or school.  To gain greater
production efficiency, some large processors may combine federally
donated meat or poultry received from multiple sources, a process
known as batching.  However, the contracts of some state agencies\1
and/or local school food authorities\2 restrict commercial processors
from batching their products under certain conditions.  Batching
restrictions are almost never an issue for poultry, which is
generally processed into a finished product before being sent to the
schools. 

Batching is different from "commingling"--another term associated
with the handling of federally donated foods.  Commingling refers to
a process in which federally donated food (e.g., flour, butter,
cheese) is stored, combined, or blended with commercially purchased
food.  Federal regulations prohibit the commingling of donated meat
or poultry. 

The Healthy Meals for Healthy Americans Act of 1994 (P.L.  103-448,
Nov.  2, 1994) required GAO to study the incidence and effect of
states' restricting commercial processors from combining federally
donated meat or poultry from multiple sources.  As agreed with your
offices, we examined the (1) reasons for and extent of state
agencies' and schools' batching restrictions; (2) impact that
batching restrictions have on commercial processors, schools, and the
federal government; and (3) mechanisms that state agencies and
schools use to ensure compliance with batching restrictions. 


--------------------
\1 State agencies include state education agencies and/or state
departments of agriculture that distribute federally donated foods. 
Fifty-four state agencies operate in the 50 states, the District of
Columbia, Puerto Rico, the U.S.  Virgin Islands, and Guam. 

\2 "Local school food authority" refers to any local school district
or other entity, such as a private school, that manages the school's
food service.  In this report, we use the term school for these
entities. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

According to USDA officials, batching restrictions are not imposed
for food safety reasons but rather because the taste of stored meat
and poultry deteriorates over time.  Some state agencies and schools
do not want their meat or poultry combined with another state's or
school's meat or poultry that has been stored for a longer time or
under questionable conditions.  Eight of the 54 state agencies that
distribute federally donated meat and poultry have no contracts with
commercial meat and poultry processors that receive products from
multiple states (known as multistate processors); 18 have contracts
without batching restrictions; and 28 have contracts restricting
batching.  However, these 28 contracts usually provide for a waiver
from these batching restrictions under certain conditions. 

According to most of the multistate processors we interviewed,
batching restrictions do not affect their operations in terms of
increased costs or decreased yields\3 for several reasons:  (1) Some
states' contracts contain no batching restrictions, (2) batching is
not a standard processing procedure for some processors because of
their size and because of their accounting and inventory controls, or
(3) processors can request waivers from batching restrictions. 
However, a few of the multistate processors expressed some concern
that the batching restrictions, if not waived, might limit their
ability to operate at full production capacity.  These processors
told us that they absorb any higher operating costs that result from
the restrictions and do not pass them directly on to the schools.  We
did not independently verify that additional costs were incurred or
that any such costs were either absorbed by the processor or passed
along in a contract bid price.  Additionally, state agencies'
batching restrictions have no effect on costs to the federal
government.  When these restrictions come into play, the federal
government has already relinquished ownership. 

To help ensure compliance with their batching restrictions, state
agencies and schools rely on the on-site graders of USDA's
Agricultural Marketing Service (AMS).  Graders perform end-product
certification for meat and poultry products.  These graders are
required to be on-site during the processing of meat and poultry
donated by USDA.  In addition to this oversight, states and schools
rely on periodic audits conducted by certified public accounting
firms, which are required by the Food and Consumer Services (FCS),
and reviews by USDA's Office of Inspector General. 


--------------------
\3 Halting operations to segregate the processing of one state's meat
or poultry from that of another state's meat or poultry almost always
increases waste and, as a result, decreases yield. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The federal cost to support school lunches in fiscal year 1995 was
over $5 billion, including over $600 million in federally donated
commodities, such as beef, poultry, flour, and canned vegetables.  In
school year 1995-96, USDA sent to schools meat and poultry valued at
about $340 million (about 181 million pounds of beef and pork and
about 157 million pounds of chicken and turkey). 

Within USDA, FCS administers the school lunch program, and AMS
purchases the meat and poultry donated to the program.  In some
cases, state agencies order finished products from FCS that are ready
to be used in preparing school lunches, such as plain hamburger
patties or chicken nuggets.  AMS buys and ships these finished
products to a designated point, either a state agency or, in some
cases, a large school district.  As a second option, state agencies
can order raw products from FCS that need more processing, such as
"coarse-ground" beef in bulk, whole chickens, or whole turkeys.  In
this case, AMS buys the meat and poultry and arranges for the
shipping directly to a processor.  The schools pay for the additional
processing and the shipping to the state and/or its schools.  This
option is known as direct diversion.  As a third option, state
agencies can order from FCS fine-ground meat or poultry in bulk. 
This option accounts for about one-half of the donated meat that AMS
buys and distributes to the schools.  The schools can use this meat
and poultry for such products as taco filling, meatloaf, and
spaghetti and chili sauces.  In the case of meat, schools store bulk
fine-ground beef for later use, and some schools may eventually ship
this ground beef back to a multistate processor for reprocessing into
another product, such as meatballs and hamburger patties.  This
shipping for further processing is known as backhauling. 


   STATE AGENCIES HAVE IMPOSED
   BATCHING RESTRICTIONS TO ENSURE
   PRODUCT QUALITY
------------------------------------------------------------ Letter :3

All state agencies that have contracts with multistate processors use
the model contract prepared by the American Commodity Distribution
Association as the basis for their agreements.  The special
provisions section of this model contract, article 35, allows state
agencies to place conditions on the processor.\4

Batching became an issue between state agencies and multistate
processors in the late 1980s, when some state agencies and schools
became concerned about processors who were combining donated meat
from multiple sources.  The state agencies were particularly
concerned about donated meat being stored for extended periods,
causing the taste of the product to deteriorate.  Consequently, they
included batching restrictions in their contracts.  In accordance
with FCS' policy, contracts usually provide for a waiver of the
batching restrictions if the processor first obtains permission from
the school(s). 

Currently, 54 state agencies distribute federally donated meat and
poultry to the schools.  Of this number, eight have no contracts with
multistate processors.  Another 18 have contracts that impose no
restrictions on batching.  The remaining 28 state agencies have
contracts containing a number of types of batching provisions.  For
example, contracts contain clauses permitting batching under certain
conditions; prohibiting the batching of products that have been
stored over a specific period of time--6, 9, or 12 months--unless
waived; and prohibiting batching with other backhauled meat under any
condition.  In the 1995-96 school year, only California prohibited
all batching.  Figure 1 provides a summary of states' batching
restrictions, and appendix I provides a list of the batching
restrictions by state. 

   Figure 1:  Summary of State
   Agencies' Contract Provisions
   on Batching

   (See figure in printed
   edition.)

Note:  Number of state agencies adds to more than 54 because some
states have multiple contract clauses dealing with batching. 

Although these batching restrictions apply to poultry in theory, they
are almost never applied in practice because poultry is usually sent
to the state as a finished product, such as chicken parts or chickens
nuggets. 


--------------------
\4 If a school wants to use a commercial processor for backhauled
meat or poultry, the school also signs the state agency's contract. 


   BATCHING RESTRICTIONS ARE OF
   MINIMAL CONCERN TO PROCESSORS
------------------------------------------------------------ Letter :4

Of the 17 multistate processors with whom we spoke, most said that
batching restrictions were not a concern.\5 For example, some
processors stated that their operations were too small to process
more than one order at a time or that they preferred keeping each
production run segregated for accounting and inventory purposes. 
Therefore, they would not combine orders from multiple sources even
if they were allowed to do so.  Eight processors told us that
batching restrictions, if not waived, would affect the costs and
yields of their operations; but most said that the effect would be
minimal.  Batching restrictions require the production line to be
stopped and started.  The cost effect occurs because wages are paid
during the downtime.  Yield is affected by increased rework.  Rework
is wholesome, salvageable product generated during a production run
that is not acceptable as the specified product.  A product such as
broken patties or nuggets or a product with other defects such as
missing breading or ridges would be classified as a rework product. 
The rework product, or 100 percent of its value, must be returned to
the schools. 

Batching restrictions usually have had no impact on poultry
processing because of the nature of the poultry industry.  Poultry
production and processing often occur under a single owner who
controls the poultry from breeding through the finished product. 
USDA officials stated that state agencies and schools usually order
the finished poultry product, thereby eliminating any concerns about
batching. 

Because the impact on multistate processors has been minimal,
batching restrictions have had no measurable effect on costs and
yields to the schools.  According to most of those processors who
told us that they do incur some additional costs associated with
batching restrictions, they do not pass these costs directly on to
the schools.  In terms of yields, schools are not affected because
their contracts guarantee them a specific yield.  We did not
independently verify that additional costs related to batching
restrictions were incurred or that any such costs that were incurred
were either absorbed by the processor or passed along in a contract
bid price for processing donated meat. 

The state agencies' contractual batching restrictions have no effect
on the federal government.  The federal government owns the meat and
poultry from its initial purchase through initial processing and
delivery to a state, school, or multistate processor.  At the time
that batching restrictions come into play, the federal government has
already relinquished ownership. 


--------------------
\5 Two of the 19 processors did not respond to our requests for
information. 


   MECHANISMS ARE IN PLACE TO
   MONITOR CONTRACT RESTRICTIONS
------------------------------------------------------------ Letter :5

Rather than establish internal controls to ensure compliance with
their batching restrictions, state agencies rely on three external
mechanisms:  (1) on-site AMS graders, (2) contractually required
audits by certified public accounting firms, and (3) periodic reviews
by USDA's Inspector General. 

FCS requires an AMS grader to generally oversee all donated meat and
poultry processing.  This oversight is intended to guarantee that the
end products are produced using only federally donated meat or
poultry, and, if applicable, that the products meet certain
contractual specifications, such as batching restrictions.  AMS'
guidelines on how graders are to do their jobs also state that
graders must certify that meat and poultry items comply with certain
contract terms. 

In addition, FCS requires that processors be audited periodically by
a certified public accounting firm, and this requirement is also a
standard clause in all state agencies' contracts to ensure that
contract specifications have been met. 

Finally, USDA's Office of Inspector General conducts periodic audits
that address processors' compliance with the prescribed procedures
and controls governing the processing of donated commodities.  In the
last 5 years, the Office has conducted three such reviews.  Our
review of these reports and a discussion with a cognizant official in
USDA's Office of Inspector General did not identify any direct
violations of batching restrictions. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

We provided copies of a draft of this report to USDA for its review
and comment.  We met with the Director of FCS' Food Distribution
Division and other cognizant agency officials.  These officials
agreed with the information contained in the draft report and
provided some clarifying comments that we incorporated into the
report.  In addition, the Director of AMS' Compliance Division
provided clarifying comments that we incorporated into the report as
appropriate. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

To determine the extent of batching restrictions for the 1995-96
school year, we asked officials in FCS' headquarters to list all
multistate processors who handle federally donated meat and poultry. 
In addition, we shared this list with officials of the American
Commodity Distribution Association to identify any needed additions
or deletions.  We then asked the multistate processors on the list to
identify which of their state agency contracts had batching
restrictions.  Finally, through officials in FCS' seven regions, we
obtained a copy of article 35 (special provisions section) from each
of these contracts. 

To determine the reasons for imposing restrictions on batching, we
spoke with officials in FCS' seven regions, which cover the 54 state
agencies.  We also spoke with state agency officials in 16 states
that backhaul fine-ground beef for further processing. 

To assess the impact of batching restrictions on processors, we spoke
with 17 of the 19 multistate commercial processors, visited a
multistate commercial processor and observed its operations, and met
with officials from the American Commodity Distribution Association. 
We did not independently verify the information these officials
provided. 

To identify the mechanisms that state agencies and schools use to
ensure adherence to batching restrictions, we spoke with AMS and FCS
officials and reviewed their monitoring guidelines and requirements. 
We also reviewed reports by USDA's Office of Inspector General on
multistate commercial processors of federally donated meat and
poultry. 

We conducted our review from April 1996 through August 1996 in
accordance with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :7.1

We are sending copies of this report to the Secretary of Agriculture
and other interested parties.  Copies will also be made available
upon request. 

If you or your staff have any questions about this report, I can be
reached at (202) 512-5138.  Major contributors to this report are
listed in appendix II. 

Robert A.  Robinson
Director, Food and
 Agriculture Issues


Congressional Committees

The Honorable Richard G.  Lugar
Chairman
The Honorable Patrick J.  Leahy
Ranking Minority Member
Committee on Agriculture, Nutrition,
 and Forestry
United States Senate

The Honorable Pat Roberts
Chairman
The Honorable E (Kika) de la Garza
Ranking Minority Member
Committee on Agriculture
House of Representatives

The Honorable William F.  Goodling
Chairman
The Honorable William "Bill" Clay
Ranking Minority Member
Committee on Economic and Educational Opportunities
House of Representatives


RESTRICTIONS ON BATCHING DONATED
MEAT AND POULTRY
=========================================================== Appendix I



                                                                            No
                                                                           batch
                                                                            ing
                                                                           with
                                                                           backh
                                                                 Wit       auled
                                                 Beef            hin  Wit  produ
                                                    /  Diverted  sam   h   ct\b/
State or         No   Beef-   Pork-  Beef  Pork  pork      with   e   app   no
other      restrict     -12     -12   --9   --9   --6  diverted  sta  rov  waive
entity         ions    mos.    mos.  mos.  mos.  mos.        \a  te   al     r
---------  --------  ------  ------  ----  ----  ----  --------  ---  ---  -----
Alabama                                                       X   X          X
Alaska            X
Arizona           X
Arkansas          X
Californi                                                         X
 a
Colorado                                X     X
Connectic                               X     X
 ut
Delaware          X
D.C.              X
Florida                                                                      X
Georgia                                                                      X
Guam\c
Hawaii\c
Idaho             X
Illinois          X
Indiana                                                           X
Iowa                                    X     X
Kansas\c
Kentucky                                                          X          X
Louisiana         X
Maine\c
Maryland                                X     X               X
Massachus                               X     X
 etts
Michigan          X
Minnesota                                                     X   X          X
Mississip
 pi\c
Missouri          X
Montana                                             X
Nebraska                                            X                  X
Nevada                                  X     X               X
New               X
 Hampshir
 e
New                                     X     X
 Jersey
New                                                                    X
 Mexico
New York                                X     X
N.                                                                X          X
 Carolina
N. Dakota         X
Ohio                                                              X          X
Oklahoma          X
Oregon            X
Pennsylva                                                              X
 nia
Puerto            X
 Rico
Rhode
 Island\c
S.                                                                X          X
 Carolina
S. Dakota         X
Tennessee                                                         X          X
Texas             X
U.S.
 Virgin
 Islands\
 c
Utah                                                          X              X
Vermont\c
Virginia                  X       X
Washingto                 X                   X
 n
W.                                      X     X
 Virginia
Wisconsin                 X                   X
Wyoming           X
================================================================================
Total            18       3       1     9    11     2         5   9    3    10
--------------------------------------------------------------------------------
\a Direct diversion refers to one of the options states have for
receiving federally donated meat.  Under this option, state agencies
can order from the Food and Consumer Service raw products that need
more processing, such as coarse-ground beef and whole turkeys.  In
this case, the Agriculture Marketing Service buys the meat or poultry
and arranges to ship it directly to a processor.  The schools then
pay for the additional processing and shipping to the state and/or
its schools. 

\b Backhauling refers to a shipping process that schools use to have
their fine-ground beef in bulk reprocessed into other products after
it has been stored for some time. 

\c Does not have a contract with a multistate processor. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

Juliann M.  Gerkens, Assistant Director
John M.  Nicholson, Jr.
Patrick J.  Kalk
Kathy R.  Alexander
Carol Herrnstadt Shulman


*** End of document. ***