[Code of Federal Regulations]

[Title 7, Volume 4]

[Revised as of January 1, 2006]

From the U.S. Government Printing Office via GPO Access

[CITE: 7CFR250.30]



[Page 471-481]

 

                          TITLE 7--AGRICULTURE

 

    CHAPTER II--FOOD AND NUTRITION SERVICE, DEPARTMENT OF AGRICULTURE

 

PART 250_DONATION OF FOODS FOR USE IN THE UNITED STATES, ITS TERRITORIES 

AND POSSESSIONS AND AREAS UNDER ITS JURISDICTION--Table of Contents

 

           Subpart C_Processing and Labeling of Donated Foods

 

Sec. 250.30  State processing of donated foods.





    (a) General. This section sets forth the terms and conditions under 

which distributing agencies, subdistributing agencies, or recipient 

agencies may enter into contracts for the processing of donated foods 

and prescribes the minimum requirements to be included in such 

contracts.

    (b) Permissible contractual arrangements. (1) A distributing agency, 

subdistributing agency, or recipient agency may contract for processing, 

pay the processing fee, and deliver the end products to eligible 

recipient agencies through its own distribution system. Distributing 

agencies shall assure that the acceptability of processed end products 

is tested with recipient agencies eligible to receive them prior to 

entering into a processing contract and shall develop a system for 

monitoring product acceptability. Distributing agencies may exempt end 

products from testing if they have been used previously, have been 

determined by the distributing agency to be acceptable by recipient 

agencies, and have had no changes in specifications.

    (2) A distributing agency or subdistributing agency may contract for 

processing on behalf of one or more recipient agencies. All recipient 

agencies eligible to receive the donated foods to be processed may 

receive end products made from those foods and produced under such 

processing contracts by virtue of the distributing agency--recipient 

agency agreement required by Sec. 250.12(b). Under this arrangement and 

subject to the approval of the distributing agency:

    (i) Processors shall utilize either a discount or a refund system as 

defined in Sec. 250.3 when they sell end products directly to recipient 

agencies, or

    (ii) When selling end products through a distributor, such sales 

shall be in accordance with paragraph (e) of this section.

    (3) Distributing agencies shall permit subdistributing agencies and 

recipient agencies to enter into processing contracts with a processor 

under arrangements similar to those described in paragraph (b) (1) or 

(2) of this section.

    (c) Requirements for processing contracts. (1) Contracts with 

processors shall be in a standard written form and shall be reviewed by 

the appropriate FNSRO. Processing contracts shall terminate on June 30 

of each year. However, processing contracts may give contracting 

agencies the option of extending contracts for two 1-year periods, 

provided that any changed information must be updated before any 

contract extension is granted, including the information in paragraphs 

(c)(3), (c)(4)(ii), and (c)(4)(viii)(B) of this section. The processor 

must have performed to the satisfaction of the contracting agency during 

the previous contract year, submitted all required reports and any 

corrections to such reports up to the time that contract extension 

occurs, and submitted its certified public accountant report as required 

under paragraph (c)(4)(xi) of this section before the contract may be 

extended. Distributing agencies shall develop criteria for use in 

evaluating and selecting processing contracts. The selection criteria 

shall be used in selecting or rejecting processors in a manner that 

ensures equitable treatment of processors. The selection criteria shall, 

at a minimum, include:

    (i) The nutritional contribution which the end product will provide;

    (ii) The marketability of the end product;

    (iii) The distribution method which the processor intends to 

utilize;

    (iv) Price and yield schedule data;

    (v) Any applicable labeling requirements; and

    (vi) The ability of the processor to meet the terms and conditions 

set forth in the regulations.



These criteria will be reviewed by the appropriate FNSRO during the 

management evaluation review of the distributing agency. Distributing 

agencies and subdistributing agencies which enter into contracts on 

behalf of recipient agencies but which do not limit the types of end 

products which can be sold or the number of processors which can sell 

end products within the State are not required to follow the selection 

criteria. In addition to utilizing these selection criteria, when a 

contracting



[[Page 472]]



agency enters into a contract both for the processing of donated food 

and the purchase of the end products produced from the donated food, the 

procurement standards set forth in Attachment O to OMB Circular A-102 

must be followed. Recipient agencies which purchase end products 

produced under Statewide agreements are also required to comply with 

Attachment O of OMB Circular A-102. Contracting agencies shall not enter 

contracts with processors which cannot demonstrate the ability to meet 

the terms and conditions of the regulations and the distributing agency 

agreements; furnish prior to the delivery of any donated foods for 

processing, a performance bond, an irrevocable letter of credit or an 

escrow account in an amount sufficient to protect the contract value of 

donated food on hand and on order; demonstrate the ability to distribute 

end products to eligible recipient agencies; provide a satisfactory 

record of integrity, business ethics and performance and provide 

adequate storage.

    (2) Standard form contracts shall be prepared or reviewed by the 

appropriate State legal staff to assure conformity with the requirements 

of these regulations and of applicable Federal, State and local laws.

    (3) The contract shall be signed for the processor by the owner, a 

partner, or a corporate officer duly authorized to sign the contract, as 

follows:

    (i) In a sole proprietorship, the owner shall sign the contract;

    (ii) In a partnership, a partner shall sign the contract;

    (iii) In a corporation, a duly authorized corporate officer shall 

sign the contract.

    (4) At a minimum, each processing contract shall include:

    (i) The names and telephone numbers of the contracting agency and 

processor;

    (ii) A description of each end product, the quantity of each donated 

food and the identification of any other ingredient which is needed to 

yield a specific number of units of each end product (except that the 

contracting agency may permit the processor to specify the total 

quantity of any flavorings or seasonings which may be used without 

identifying the ingredients which are, or may be, components of 

flavorings or seasonings), the total weight of all ingredients in the 

batch formula, the yield factor for each donated food, and any pricing 

information provided by the processor in addition to that required in 

paragraph (c)(4)(iii) of this section as requested by the contracting 

agency and a thorough explanation of what this additional pricing 

information represents. The yield factor is the percentage of the 

donated food which must be returned in the end product to be distributed 

to eligible recipient agencies. For substitutable donated foods, at 

least 100 percent of the donated food provided to the processor must be 

physically contained in the end products with no allowable tolerance;

    (iii) The contract value of each donated food to be processed and, 

where processing is to be performed only on a fee-for-service basis as 

defined in Sec. 250.3, the fee-for-service;

    (iv) A provision for:

    (A) Termination of the contract upon thirty days written notice by 

the contracting agency or the processor and

    (B) Immediate termination of the contract when there has been 

noncompliance with its terms and conditions by the contracting agency or 

the processor;

    (v) In the event of contract termination, a provision for 

disposition of donated foods and end products in the processor's 

inventories or payment of funds in accordance with paragraph (j) of this 

section;

    (vi) A provision for inspection and certification during processing, 

where applicable, by the appropriate acceptance service in accordance 

with paragraphs (g) and (h) of this section;

    (vii) A provision that end products containing donated foods that 

are not substitutable under paragraph (f) of this section shall be 

delivered only to eligible recipient agencies and that end products 

containing both substitutable and non-substitutable donated foods may be 

delivered and sold in accordance with the requirements of paragraph (d) 

and (e) of this section;

    (viii) Provisions that the processor shall:

    (A) Fully account for all donated foods delivered into its 

possession by



[[Page 473]]



production and delivery to the contracting agency or eligible recipient 

agencies of an appropriate number of units of end products meeting the 

contract specifications, and where end products are sold through a 

distributor, that the processor remains full accountable for the donated 

foods until refunds or any other credits equal to their contracted value 

have been made to eligible recipient agencies in accordance with 

paragraph (k) of this section or to distributing agencies in accordance 

with paragraph (n)(2) of this section;

    (B) Furnish to the contracting agency prior to the delivery of any 

donated foods for processing documentation that a performance supply and 

surety bond from a surety company listed in the most recent U.S. 

Department of Treasury Circular 570, an irrevocable letter of credit or 

an escrow account has been obtained in an amount that is sufficient to 

protect the contract value of all donated foods. Since the distributing 

agency is held liable by FNS for any donated foods provided to a 

processor the distributing agency shall determine the dollar value of 

the performance supply and surety bond, irrevocable letter of credit or 

the escrow account taking into consideration the

    (1) Value of donated foods on hand;

    (2) Value of donated foods on order and

    (3) Anticipated usage rate during the contract period;

    (C) Use or dispose of the containers in which donated foods are 

received from the Department in accordance with the instructions of the 

contracting agency;

    (D) Apply as credit against the processing fee or return to the 

contracting agency and identify:

    (1) Any funds received from the sale of containers, and

    (2) The market value or the price received from the sale of any by-

products of donated foods or commercial foods which have been 

substituted for donated foods;

    (E) Substitute donated foods with commercially purchased foods only 

in accordance with paragraph (f) of this section;

    (F) Meet the requirements of paragraph (i) of this section for 

labeling end products;

    (G) Maintain accurate and complete records pertaining to the 

receipt, disposal, and inventory of donated foods in accordance with 

Sec. 250.16;

    (H) Submit processing performance reports in accordance with 

paragraph (m) of this section; and

    (I) Submit annual reconciliation reports and make payments to 

distributing agencies for any inventory remaining at the termination of 

the contract in accordance with paragraph (n)(3) of this section.

    (ix) A provision that approval of the contract by distributing 

agency shall not obligate that agency or the Department to deliver 

donated foods for processing;

    (x) A description of the processor's quality control system and 

assurance that an effective quality control system will be maintained 

for the duration of the contract;

    (xi) In instances when the processor is a multi-State processor as 

defined in Sec. 250.3, a provision that the processor agrees to obtain 

an independent audit by a certified public accountant in accordance with 

Sec. 250.18(b);

    (xii) A requirement that inventory drawdowns shall be limited to the 

actual amount of donated foods contained in the end product. Additional 

commodity required to account for production loss shall be obtained from 

non-donated foods;

    (xiii) A provision that the fee-for-service or value pass-through 

system to be used for the sale of end products to recipient agencies 

shall be described and be consistent with paragraphs (d) and (e) of this 

section.

    (xiv) In instances when the distributing agency has delegated the 

responsibility for sales verification for end products provided by a 

distributor to recipient agencies at a discount, assurance that the 

processor will submit sales verification data to the distributing agency 

in accordance with Sec. 250.30(m)(l); and

    (xv) A provision that the contracting agency shall give the 

processor a list of all recipient agencies eligible to purchase end 

products under the contract and provide updates for any changes



[[Page 474]]



which occur during the contract period.

    (xvi) A provision that the processor shall not assign the processing 

contract or delegate any aspect of processing under a subcontract or 

other arrangement without the written consent of the contracting agency 

and the distributing agency.

    (xvii) A provision that the processor shall provide pricing 

information summaries and updated pricing information summaries as 

required in paragraphs (d)(3) and (e)(2) of this section.

    (xviii) A provision that the processor shall maintain documentation 

which demonstrates that the level of the processor's commercial 

production has not been reduced, as required in paragraph (f)(1)(iii) of 

this section.

    (d) End products sold by processors. (1) When recipient agencies pay 

the processor for end products, such sales shall be under:

    (i) A refund system as defined in Sec. 250.3 and in accordance with 

paragraph (k) of this section; or

    (ii) A discount system which provides the price of each unit of end 

product purchased by eligible recipient agencies to be discounted by the 

stated contract value of the donated foods contained therein; or

    (iii) An alternative value pass-through system under which the value 

of the donated food contained in each unit of end product shall be 

passed to the recipient agency and which has been approved by FNS at the 

request of the distributing agency. Any alternative value pass-through 

system approved under this paragraph must comply with the sales 

verification requirements specified in Sec. 250.19(b) of this part, or 

an alternative verification system approved by FNS. The Department 

retains the authority to inspect and review all pertinent records 

including records pertaining to the verification of a statistically 

valid sample of sales. FNS may consider the paperwork and resource 

burden associated with alternative value pass-through systems when 

considering approval and reserves the right to deny the approval of 

systems which are labor-intensive and provide no greater accountability 

than those systems permitted under paragraphs (d) and (e) of this 

section.

    (2) When a processor delivers end products produced under a fee-for-

service contract, the processor shall separately identify on the bill 

for the recipient agency the agreed-upon fee-for-service and any 

delivery costs.

    (3) Processors shall provide pricing information summaries to 

contracting agencies and contracting agencies shall provide this 

information to recipient agencies as soon as possible after contract 

approval. If this pricing information changes during the contract 

period, processors shall provide updated pricing information to the 

contracting agency 30 days prior to the effective date of the change, 

which, in turn, shall provide this updated information to eligible 

recipient agencies.

    (e) End products sold by distributors. (1) When a processor 

transfers end products to a distributor for delivery and sale to 

recipient agencies, such sales shall be under:

    (i) A refund system as defined in Sec. 250.3 and in accordance with 

paragraph (k) of this section; or

    (ii) A hybrid system which provides a refund for the contract value 

of the donated food shall be provided to the distributor in accordance 

with paragraph (k) of this section and the price of each unit of end 

product purchased by eligible recipient agencies through a distributor 

shall be discounted by the contract value of the donated foods contained 

therein; or

    (iii) An alternative value pass-through system under which the 

contract value of the donated food contained in each unit of end product 

shall be passed on to the recipient agency and which has been approved 

by FNS in accordance with paragraph (d)(1)(iii) of this section; or

    (iv) When a processor arranges for delivery of processed end 

products produced under fee-for-service contracts by distributors, the 

products shall be delivered and invoiced using one of the following 

procedures:

    (A) The recipient agency is billed by the processor for the fee-for-

service and the distributor bills the recipient agency for the storage 

and delivery of the end products; or

    (B) The processor arranges for the delivery of end products through 

a distributor on behalf of the recipient



[[Page 475]]



agency. In this system, the processor's invoice must include both the 

fee-for-service and the distributor's charges as separate, clearly 

identifiable charges.

    (2) Processors shall provide pricing information summaries to 

contracting agencies and contracting agencies shall provide this 

information to recipient agencies as soon as possible after contract 

approval. If this pricing information changes during the contract 

period, the processor shall provide updated pricing information to the 

contracting agency, which, in turn, shall provide this information to 

the eligible recipient agencies.

    (f) Substitution of donated foods with commercial foods. (1) The 

processing contract may provide for substitution of donated foods as 

defined in Sec. 250.3 except that donated beef and donated pork shall 

not be substitutable. Any substitution of commercial product for 

commodities other than beef, pork, or poultry is subject to a 100-

percent yield requirement. Under the 100-percent yield requirement, the 

processor is responsible for any manufacturing losses.

    (i) All components of commercial foods substituted for any donated 

food must be of U.S. origin and identical or superior in every 

particular of the donated food specification. Records must be maintained 

to allow independent verification that the substituted food meets the 

above condition.

    (ii) Poultry shall be eligible for limited substitution. Any 

processors that wish to substitute poultry must have a plan approved by 

both FNS and AMS. Only bulk pack chicken, chicken parts, and bulk pack 

turkey delivered by USDA vendors to the processor are eligible for 

substitution. No backhauled poultry product may be substituted. 

(Backhauled product is typically cut-up frozen poultry parts delivered 

to schools that may be turned over to processors for further processing 

at a later time.) Should a processor want to amend its approved plan, it 

shall submit any amendments to USDA for approval prior to implementing 

such amendments.

    (A) Substitution of commercial poultry may occur in advance of the 

actual receipt of the donated poultry by the processor. Should a 

processor choose to use the substitution option prior to the commodity 

being purchased by the USDA, the processor shall assume all risks. Any 

donated poultry not used in end products because of substitution shall 

only be used by the processor at one of its facilities in other 

commercially processed products and cannot be sold as an intact unit. 

However, in lieu of processing the donated poultry, the processor may 

use the commodity product to fulfill other USDA contracts awarded for 

delivery to another processor provided all terms of the other contract 

are met. Any variation between the amount of commercial poultry 

substituted and the amount of donated poultry received by the processor 

shall be adjusted according to guidelines furnished by USDA.

    (B) The substitution plan shall contain a step-by-step description 

of how production will be monitored; a complete description of the 

records that will be maintained for the commercial poultry substituted 

for the donated poultry and the disposition of the donated poultry 

delivered; and how the substitution will be tracked for the purpose of 

monthly reporting to the State distributing agencies. Poultry 

substitution shall not be subject to the 100-percent yield requirement; 

however, the AMS Grading Service must verify processing yields. Should a 

processor choose to have all production of a specific end product, 

identified by name and product code, produced under AMS grading, then 

the label ``Contains Commodities Donated by the United States Department 

of Agriculture. This Product Shall Only Be Sold to Eligible Recipient 

Agencies'' shall not be required. Finished poultry end products that 

have not been produced under AMS grading supervision may not be 

substituted for finished commodity end products.

    (iii) Processors shall maintain documentation that they have not 

reduced their level of commercial production because of participation in 

the State processing program.

    (2) Documentation must be maintained by both parties in accordance 

with Sec. 250.16. Where commercial food is authorized to be substituted 

for any donated, the processor shall maintain records to substantiate 

that it continues to acquire on the commercial



[[Page 476]]



market sufficient purchases of substitutable food for commercial 

production and any amounts necessary to meet the 100 percent yield 

requirement. When there is substitution, the donated foods shall be used 

by the processor and shall not otherwise be sold or disposed of in bulk 

form. The applicable Federal acceptance service shall, upon request by 

the Department, the contracting agency or the distributing agency 

determine if the quality analysis meets the requirements set forth in 

the original USDA procurement specification and, in the case of 

concentrated skim milk replacing donated nonfat dry milk, determine if 

the concentrated skim milk contains the amount of milk solids as 

specified in the contract. When donated foods are nonsubstitutable, the 

applicable Federal acceptance service shall ensure against unauthorized 

substitutions, and verify that quantities of donated foods used are as 

specified in the contract.

    (3) When concentrated skim milk is used to replace donated nonfat 

dry milk, the contract shall also specify (in addition to the 

requirements in paragraph (c) of this section):

    (i) The percent of milk solids that, at a minimum, must be contained 

in the concentrated skim milk;

    (ii) The weight ratio of concentrated skim milk to donated nonfat 

dry milk;

    (A) The weight ratio is the weight of concentrated skim milk which 

equals one pound of donated nonfat dry milk, based on milk solids;

    (B) In calculating this weight, nonfat dry milk shall be considered 

as containing 96.5 percent milk solids;

    (C) If more than one concentration of concentrated skim milk is to 

be used, a separate weight ratio must be specified for each 

concentration;

    (iii) The processor's method of verifying that the milk solids 

content of the concentrated skim milk is as stated in the contract;

    (iv) A requirement that inventory drawdowns of donated nonfat dry 

milk shall be limited to an amount equal to the amount of concentrated 

skim milk, based on the weight ratio, used to produce the end product;

    (v) A requirement that the contract value of donated food for a 

given amount of concentrated skim milk used to produce an end product is 

the value of the equivalent amount of nonfat dry milk, based on the 

weight ratio of the two foods;

    (vi) A requirement that the concentrated skim milk shall be produced 

in a USDA approved plant or in a plant approved by the appropriate 

regulatory authority for the processing of Grade A milk products; and

    (vii) A requirement that documentation sufficient to substantiate 

compliance with the contract provisions shall be maintained in 

accordance with Sec. 250.16(a)(4).

    (4) Title to the substituted food shall transfer to the contracting 

agency upon the initiation of the processing of the end product 

containing the substituted food. Title to the equivalent amount of 

donated food shall transfer to the processor at the same time (except 

when the substitution is necessary to meet the 100 percent yield 

requirement or to otherwise replace missing or out-of-condition donated 

food). As with the processing of donated poultry into end products, AMS 

graders must monitor the processing of any substituted commercial 

poultry to ensure that program integrity is maintained. Once title has 

transferred, the processor shall use the substituted food in accordance 

with the terms and conditions of this part.

    (g) Meat and poultry inspection programs. When donated meat or 

poultry products are processed or when any commercial meat or poultry 

products are incorporated into an end product containing one or more 

donated foods, all of the processing shall be performed in plants under 

continuous Federal meat or poultry inspection, or continuous State meat 

or poultry inspection in States certified to have programs at least 

equal to the Federal inspection programs. In addition to FSIS 

inspection, all donated meat and poultry processing shall be performed 

under AMS acceptance service grading. The cost of this service shall be 

borne by the processor. In the event the processor can demonstrate that 

grading is impractical, exemptions in the use of acceptance services 

shall be approved by the distributing agency prior to processing each 

order. Exemptions in



[[Page 477]]



the use of acceptance service graders will be authorized on the basis of 

each order to be processed provided the processor can demonstrate:

    (1) That even with ample notification time, the processor cannot 

secure the services of a grader,

    (2) That the cost for a grader would be unduly excessive relative to 

the value of foods being processed and that production runs cannot be 

combined or scheduled to enable prorating of the costs of services among 

the purchasers of end products, or

    (3) The documented urgency of the recipient agency's need for the 

end product precludes the use of acceptance services.



Prior to approving a processor's request to waive the acceptance service 

requirement the distributing agency shall ensure, based on the 

processor's past performance, that the quality of the end product 

produced will in no way be adversely affected as a result of waiving the 

requirement.

    (h) Certification by acceptance service. (1) All processing 

activities of donated foods shall be subject to review and audit by the 

Department, including the applicable Federal acceptance service. The 

contracting agency may also require acceptance and certification by such 

acceptance service in addition to the requirements set forth in 

paragraph (g) of this section.

    (2) In the case of substitutable donated foods, in deciding whether 

to require acceptance and certification, the contracting agency should 

consider the dollar value of the donated foods delivered to the 

processor.

    (3) When contracting agencies require certification in accordance 

with paragraph (h) (1) or (2) of this section, the degree of acceptance 

and certification necessary under the processing contract shall be 

determined by the appropriate Federal acceptance service after 

consultation with the distributing agency concerning the type and volume 

of the donated foods and anticipated value of end products to be 

processed. The cost of this service shall also be borne by the 

processor.

    (i) Labeling end products. (1) Except when end products contain 

donated foods that are substituted under paragraph (f) of this section, 

the exterior shipping containers of end products and, where practicable, 

the individual wrappings or containers of end products, shall be clearly 

labeled ``Contains Commodities Donated by the United States Department 

of Agriculture. This Product Shall Be Sold Only to Eligible Recipient 

Agencies.''

    (2) Labels on all end products shall meet applicable Federal 

labeling requirements.

    (3) When a processor makes any claim with regard to an end product's 

contribution toward meal requirements of any child nutrition program, 

the processor shall follow procedures established by FNS, the Food 

Safety and Inspection Service of the Department, the National Marine 

Fisheries Service of the U.S. Department of Commerce or other applicable 

Federal agencies for approval of such labels.

    (j) Termination of processing contracts. (1) When contracts are 

terminated or completed and the processor has commodities remaining in 

inventory, the processor shall be directed, at the option of the 

distributing agency and the FNSRO, to do the following:

    (i) With respect to nonsubstitutable commodities, the processor 

shall:

    (A) Return the commodities to the contracting agency;

    (B) Pay the contracting agency for the commodities based on the 

Department's replacement costs, determined by using the most recent data 

provided by the Department; or

    (C) Pay the contracting agency for the commodities based on the 

contract value stated in the processor's contract;

    (D) Pay the contracting agency the CCC unrestricted sales price;

    (ii) With respect to substitutable commodities, the processor shall:

    (A) With the concurrence of any affected contracting agencies, 

transfer the donated foods to the accounts of other contracting agencies 

with which the processor has contracts;

    (B) Return the foods donated to the contracting agency;

    (C) Replace the commodities with the same foods of equal or better 

quality as certified in accordance with paragraph (f)(2) of this section 

and deliver such foods to the contracting agency;



[[Page 478]]



    (D) Pay the contracting agency for the commodities based on the 

Department's replacement costs, determined by using the most recent data 

provided by the Department; or

    (E) Pay the contracting agency for the commodities based on the 

contract value stated in the processor's contract.

    (F) Pay the contracting agency the CCC unrestricted sales price.

    (2) When a processor's contract is terminated at the processor's 

request or due to noncompliance or negligence on the part of the 

processor and commodities remaining in the processor's inventory are 

transported pursuant to paragraph (j)(1)(i)(A), (j)(1)(ii)(B) or 

(j)(1)(ii)(C) of this section, the processor shall pay the 

transportation costs.

    (3) Funds received by distributing agencies upon termination of 

contracts shall be used in accordance with FNS Instruction 410-1, Non-

Audit Claims, Food Distribution Program.

    (k) Refund payments. (1) When end products are sold to recipient 

agencies in accordance with the refund provisions of paragraph (d) or 

(e) of this section, each recipient agency shall submit refund 

applications to the processor within 30 days from the close of the month 

in which the sales were made, except that recipient agencies may submit 

refund applications to a single processor on a Federal fiscal quarterly 

basis if the total anticipated refund due for all purchases of product 

from that processor during the quarter is 25 dollars or less.

    (2) In instances when refunds are to be provided to distributors 

which have sold end products to recipient agencies at a discount, 

distributors shall submit refund applications to processors within 30 

days from the close of the month in which the sales were made of the 

date of sale to recipient agencies in order to receive benefits.

    (3) Not later than 30 days after receipt of the application by the 

processor, the processor shall make a payment to the recipient agency or 

distributor equal to the stated contract value of the donated foods 

contained in the purchased end products covered by the refund 

application, except that processors may group together refund 

applications for a single recipient agency on a Federal fiscal quarterly 

basis if the total anticipated refund due that recipient agency during 

the quarter is 25 dollars or less. Copies of requests for refunds and 

payments to recipient agencies and/or distributors shall be forwarded to 

the appropriate distributing agency by the processor.

    (l) Contract approvals. Distributing agencies shall review and 

approve processing contracts entered into or renewed by subdistributing 

and recipient agencies prior to the delivery of commodities for 

processing under such contracts. The distributing agency which enters 

into or approves a processing contract shall provide a copy of the 

contract and of these regulations to the processors, forward a copy of 

the contract to the appropriate FNSRO, and retain a copy for its files.

    (m) Performance reports. (1) Processors shall be required to submit 

to distributing agencies monthly reports of performance under each 

processing contract with year-to-date totals. Processors contracting 

with agencies other than a distributing agency shall submit such reports 

to the distributing agency having authority over that particular 

contracting agency. Performance reports shall be postmarked no later 

than the final day of the month following the reporting period; however, 

the final performance report for the contract period shall be postmarked 

no later than 60 postmarked days from the close of the contract year. 

The report shall include:

    (i) A list of all recipient agencies purchasing end products under 

the contract;

    (ii) Donated-food inventory at the beginning of the reporting 

period;

    (iii) Amount of donated foods received during the reporting period;

    (iv) Amount of donated foods transferred to and/or from existing 

inventory;

    (v) Number of units approved end products delivered to each eligible 

recipient agency during the reporting period and the number of pounds of 

each donated food represented by these delivered end products;

    (vi) Donated food inventory at the end of the reporting period;

    (vii) [Reserved]



[[Page 479]]



    (viii) In instances in which sales verification has been delegated 

to the processor pursuant to Sec. 250.19(b)(2), sales verification 

findings shall be reported as an attachment to the December and June 

performance reports in whatever format the State distributing agency 

deems necessary.

    (ix) A certification statement that sufficient donated foods are in 

inventory or on order to account for the quantities needed for 

production of end products for State processing contracts and that the 

processor has on hand or on order adequate quantities of foods purchased 

commercially to meet the processor's production requirements for 

commercial sales.

    (2) In addition to reporting the information identified in paragraph 

(m)(1) of this section, processors which substitute concentrated skim 

milk for donated nonfat dry milk shall also report the following 

information for the reporting period:

    (i) The number of pounds of nonfat dry milk used in commercial 

products sold to outlets which are not recipient agencies; and

    (ii) The number of pounds of concentrated skim milk, and the percent 

of milk solids contained therein, used in end products sold to recipient 

agencies.

    (3) Distributing agencies shall review and analyze reports submitted 

by processors to ensure that performance under each contract is in 

accordance with the provisions set forth in this section.

    (n) Inventory controls. (1) Distributing agencies shall monitor 

processor inventories to ensure that the quantity of donated foods for 

which a processor is accountable is the lowest cost-efficient level but 

in no event more than a six-month supply based on the processor's 

average monthly usage, unless a higher level has been specifically 

approved by the distributing agency on the basis of a written 

justification submitted by the processor. Under no circumstances should 

the amount of donated foods ordered by the contracting agency for 

processing purposes be in excess of anticipated usage or beyond the 

processor's ability to accept and store the donated foods at any one 

time. Distributing agencies shall make no further distribution to 

processors whose inventories exceed these limits until such inventories 

have been reduced.

    (2) For processors substituting concentrated skim milk for donated 

nonfat dry milk, distributing agencies shall review the processors' 

monthly performance reports to ensure that:

    (i) Donated nonfat dry milk inventory is being drawn down based on 

the amount of milk solids contained in the concentrated skim milk which 

was used in end products sold to eligible recipient agencies;

    (ii) An amount of milk solids equivalent to the amount in the 

donated nonfat dry milk is contained in end products sold to eligible 

recipient agencies; and

    (iii) Donated nonfat dry milk is not being sold in bulk form.

    (3) The last monthly performance report for the contract period, as 

required in paragraph (m)(1) of this section, shall serve as the annual 

reconciliation report. As a part of the annual reconciliation, a 

processor which has entered into a contract with the contracting agency 

for the next year shall pay the distributing agency, at the contract 

value, for any donated food inventory held which is in excess of the 

inventory level which has been approved by the State distributing 

agency. A processor whose contract has been completed or terminated 

shall return or pay for commodities as required by subsection (j).

    (4) Distributing agencies shall certify the accuracy of the annual 

reconciliation report and forward it to the FNS Regional Office. Such 

report shall be postmarked no later than 90 days following the close of 

the contract year. All monies shall be used in accordance with FNS 

Instruction 410-1, Non-Audit Claims, Food Distribution Program.

    (5) Distributing agencies shall not submit food requisitions 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 product promotion or sales expansion.

    (o) Processing inventory reports. (1) Distributing agencies shall 

forward to the FNS Regional Office the inventory



[[Page 480]]



summary portion of the monthly performance report submitted by the 

processors in accordance with paragraph (m)(1) of this section for the 

last month of each Federal fiscal quarter. Such reports shall be 

postmarked no later than 60 days following the close of each Federal 

fiscal quarter, except that such reports shall be postmarked no later 

than 90 days following the close of the contract year.

    (2) In addition to the reporting requirements in paragraph (o)(1) of 

this section, for each processor which substitutes concentrated skim 

milk for donated nonfat dry milk the distributing agency shall also 

report the following information for the reporting period:

    (i) The number of pounds of nonfat dry milk used in commercial 

products sold to nonprogram outlets; and

    (ii) The number of pounds of concentrated skim milk and the percent 

of milk solids contained therein used in end products sold to recipient 

agencies.

    (p) Cooperation with administering agencies for child nutrition 

programs. If the distributing agency which enters into or approves 

contracts for end products to be used in a child nutrition program does 

not also administer such program, it shall collaborate with the 

administering agency by;

    (1) Giving that agency an opportunity to review all such contracts 

to determine whether end products to be provided contribute to required 

nutritional standards for reimbursement under the applicable regulations 

for such program (7 CFR parts 210, 225, and 226) or are otherwise 

suitable for use in such program;

    (2) Consulting with the agency with regard to the labeling 

requirements for the end products; and

    (3) Otherwise requesting technical assistance as needed from that 

agency.

    (q) FNSRO review of contracts and inventory reports. The FNSRO 

shall:

    (1) Review all processing contracts and provide guidance, including 

written recommendations for termination, where necessary, to 

distributing agencies concerning any contracts which do not meet the 

requirements of this section;

    (2) Allow distributing agencies 30 days to respond to any 

recommendation concerning contracts not meeting the requirements of this 

section;

    (3) Review and analyze the processing inventory reports required by 

paragraph (o) of this section to ensure that no additional donated foods 

shall be distributed to processors with excess inventories until such 

inventories have been reduced;

    (4) Assist distributing agencies in reducing such inventories; and

    (5) Review annual reconciliation reports required by paragraph (n) 

of this section and ensure that payments for commodities have been made.

    (r) Availability of copies of processing contracts. Contracts 

entered into in accordance with this Section are public records and FNS 

will provide copies of such contracts to any person upon request. The 

FNSRO will retain copies of processing contracts submitted by 

distributing agencies for a period of three years from the close of the 

Federal fiscal year to which they pertain.

    (s) Processing activity guidance. Distributing agencies shall 

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 shall 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 shall include, at a minimum, statements of the 

distributing agency's policies and procedures on (1) contract approval, 

(2) monitoring and review of processing activities, (3) recordkeeping 

and reporting requirements, (4) inventory controls, and (5) refund 

applications.

    (t) Waiver authority. 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



[[Page 481]]



designed to improve the State processing of donated foods.



(Approved by the Office of Management and Budget under control number 

0584-0007)



[53 FR 20226, June 3, 1988, as amended at 53 FR 20598, June 6, 1988; 53 

FR 27476, July 21, 1988; 53 FR 46080, Nov. 16, 1988; 54 FR 7525, Feb. 

22, 1989; 54 FR 25564, June 16, 1989; 58 FR 39122, July 22, 1993; 59 FR 

62984, Dec. 7, 1994; 61 FR 5272, Feb. 12, 1996; 67 FR 65015, Oct. 23, 

2002]