[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: 7CFR252.4]



[Page 508-514]

 

                          TITLE 7--AGRICULTURE

 

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

 

PART 252_NATIONAL COMMODITY PROCESSING PROGRAM--Table of Contents

 

Sec. 252.4  Application to participate and agreement.



    (a) Application by processors to participate. Any food processor is 

eligible to apply for participation in the NCP Program. Agreement 

applications may be filed with FNS at any time on an FNS-approved form. 

FNS will accept or reject the application of each individual food 

processor within 30 days from the date of receipt, except that FNS may, 

at its discretion, extend such period if it needs more information in 

order to make its determination. In determining whether to accept or 

reject an application, FNS shall take into consideration at least the 

following matters: the financial responsibility of the applicant; the 

ability of the applicant to meet the terms and conditions of the 

regulations and the NCP agreement; ability to accept and store 

commodities in minimum truckload quantities; historical performance 

under the State and NCP processing programs; anticipated new markets for 

NCP end products; geographic areas served by the processor; the ability 

of the applicant to distribute processed products to eligible recipient 

agencies; and a satisfactory record of integrity, business ethics and 

performance. In addition, the processors must demonstrate



[[Page 509]]



their ability to sell end products under NCP by submitting supporting 

documentation such as written intent to purchase, bids awarded, or 

historical sales performance. FNS will make a final determination based 

on all available documentation submitted.

    (b) Agreement between FNS and Participating Food Processors. Upon 

approval of an application for participating in the NCP Program, FNS 

shall enter into an agreement with the applicant food processor. All 

agreements under the NCP Program will terminate on the June 30th 

following the agreement approval date. However, FNS may extend 

processing contracts for two 1-year periods, provided that any changed 

information must be updated before any contract extension is granted, 

including the information in paragraphs (c)(1) and (c)(5) of this 

section.

    (c) Processor requirements and responsibilities. In accordance with 

the following provisions and the NCP agreement, any processor 

participating in the NCP Program may sell to any eligible recipient 

agency nationwide a processed product containing the donated food 

received from FNS.

    (1) The processor shall submit to FNS end product data schedules 

which include a description of each end product to be processed, the 

quantity of each donated food and any other ingredient which is needed 

to yield a specific number of units of each end product. FNS may permit 

processors 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 seasonings or flavorings. The end product data 

schedule shall provide pricing information supplied by the processor as 

requested by FNS and a thorough explanation of what this pricing 

information represents. The end product data schedule shall be made a 

part of the NCP agreement.

    (2) When determining the value of the donated food, the processor 

shall use the agreement value of the donated food which shall be the 

price assigned by the Department to a donated food which reflects the 

Department's current acquisition price, transportation and, if 

applicable, processing costs related to the food.

    (3) The processor shall demonstrate to the satisfaction of FNS that 

internal controls are in place to insure that duplicate reporting of 

sales under the NCP Program and any other food distribution program does 

not occur.

    (4) The processor shall use a method of selling end products to 

recipient agencies which ensures that the price of each case of end 

product is reduced by the agreement value of the donated commodity and 

ensures proper accountability. In line with FNS guidelines and subject 

to FNS approval, the processor shall select one or more of the following 

donated food value return systems to use during the term of the 

agreement. Regardless of the method used, processors shall provide 

pricing information summaries to recipient agencies as soon as possible 

after contract approval by FNS. If the pricing information changes 

during the contract period, processors shall provide updated pricing 

information to FNS and the recipient agencies 30 days prior to the 

effective date. Regardless of the method chosen for selling end 

products, the processor shall reduce his inventory only by the amount of 

donated food represented by the discount or refund placed on the end 

product.

    (i) Direct sale. A direct sale is a sale by the processor directly 

to the eligible recipient agency. The following two methods of direct 

sales are allowed:

    (A) Discount system. When the recipient agency pays the processor 

directly for an end product purchased, the processor shall invoice the 

recipient agency at the net case price which shall reflect the value of 

the discount established in the agreement.

    (B) Refund system. The processor shall invoice the recipient agency 

for the commercial/gross price of the end product. The recipient agency 

shall submit a refund application to the processor within 30 days of 

receipt of the processed end product, except that recipient agencies may 

submit refund applications to a single processor on a Federal fiscal 

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

end product from that processor during the quarter is 25 dollars or 

less. The processor shall pay directly to the eligible recipient agency 

within



[[Page 510]]



30 days of receipt of the refund application from the recipient agency, 

an amount equal to the established agreement value of donated food per 

case of end product multiplied by the number of cases delivered to and 

accepted by the recipient agency, except that processors may group 

together refund applications for a single recipient agency on a Federal 

fiscal quarterly basis if the total anticipated refund due that 

recipient agency during the quarter is 25 dollars or less. In no event 

shall refund applications for purchases during the period of agreement 

be accepted by the processor later than 60 days after the close of the 

agreement period.

    (ii) Indirect sale. An indirect sale is a sale by the processor 

through a distributor to an eligible recipient agency. Indirect sales 

can be made with or without dual billing. Dual billing involves the 

processor billing the recipient agency for the end product and the 

distributor billing the recipient agency for the cost of services 

rendered in the handling and delivery of the end product. The following 

three methods of indirect sales are allowed:

    (A) Sale through distributor with dual billing. When end products 

are sold to recipient agencies through a distributor under a system 

utilizing dual billing, the processor shall invoice the recipient 

agencies directly for the end products purchased at the net case price 

which reflects the value of the discount established in the agreement. 

The processor shall ensure that the distributor bills the recipient 

agencies only for the services rendered in the handling and delivery of 

the end product. The processor shall maintain delivery and/or billing 

invoices to substantiate the quantity of end product delivered to each 

recipient agency and the net case price charged by the processor which 

reflects the discount established by the agreement.

    (B) Sale through distributor without dual billing. When end products 

are sold to recipient agencies through a distributor without dual 

billing, processors shall provide refunds to the distributor and ensure 

that the distributor provides discounts of equal value to recipient 

agencies. Under this system, the processor shall sell end products to a 

distributor at the processor's commercial/gross price for the end 

product. The processor's invoice shall reflect the value of commodities 

contained in the end product as established by the agreement. The 

processor shall ensure that the distributor submits a refund application 

to the processor within 30 days after the eligible recipient agency 

receives the processed end product. The processor shall ensure that the 

refund application includes documentation of the purchase of end 

products by the eligible recipient agency through substantiating 

invoices and that the recipient agency has purchased the end product at 

the net case price which reflects the value of the discount established 

by the agreement. Within 30 days of the receipt of the refund 

application, the processor shall issue payment directly to the 

distributor in an amount equal to the stated agreement value of the 

donated food contained in the purchased end products covered by the 

application. In no event shall refund applications for purchases during 

the period of agreement be accepted by the processors later than 60 days 

after the close of the agreement period. The processor shall verify a 

statistically valid sample of discount sales made by distributors 

without dual billing in a manner which ensures a 95 percent confidence 

level. All such sales reported during a quarter shall be verified at the 

end of that quarter. Processors shall verify that sales were made only 

to eligible recipient agencies and that the value of donated commodities 

was passed through to those recipient agencies. The processor shall 

report to FNS the level of invalid or inaccurate sales identified in 

each quarter within 60 days after the close of each quarter. At the same 

time such report is submitted, the processor shall submit to FNS a 

corrective action plan designed to correct problems identified in the 

verification effort. The processor shall adjust performance reports to 

reflect the invalid sales identified during the verification effort 

required by this paragraph. If, as a result of this verification, FNS 

determines that the value of donated food has not been passed on the 

recipient agencies or that end products have been improperly 

distributed, FNS may assert a claim against the processor.



[[Page 511]]



    (C) Sale through distributor with a refund. Under the refund system, 

processors shall sell end products to distributors at the commercial/

gross price of the end product. Distributors shall sell end products to 

recipient agencies at the commercial/gross price of the end products. 

Processors shall ensure that their invoices and the invoices of 

distributors identify the discount established by the agreement. 

Recipient agencies shall submit refund applications to processors within 

30 days of receipt of the processed end product. Within 30 days of the 

receipt of the refund application from the recipient agency certifying 

actual purchases of end product from substantiating invoices maintained 

by the recipient agency, the processor shall compute the amount and 

issue payment of the refund directly to the recipient agency. In no 

event shall refund applications for purchases during the period of the 

agreement be accepted by the processor later than 60 days after the 

close of the agreement period.

    (iii) Other value pass-through systems. Processors may submit to FNS 

for approval any proposed value pass-through (VPT) system not identified 

in this section. The ``other'' VPT system must, in the judgment of FNS, 

be verifiable and easily monitored. Any VPT system approved under this 

part must comply with the sales verification requirements specified in 

paragraph (c)(4)(ii)(B) of this section or an alternative system 

approved by FNS. If an alternative system is approved, FNS will notify 

the States in which the system will be used. The Department retains the 

authority to inspect and review all pertinent records under all VPT 

systems, including the verification of a required 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 approval of systems which are 

labor-intensive and provide no greater accountability than those systems 

permitted under paragraph (c)(4) of this section.

    (5) The processor shall furnish to FNS prior to the ordering of any 

donated food for processing, a performance supply and surety bond 

obtained from surety companies listed in the current Department of 

Treasury Circular 570 or an irrevocable letter of credit to cover the 

amount of inventory on hand and on order.

    (6) The processor shall draw down inventory only for the amount of 

donated food used to produce the end product. In instances in which 

concentrated skim milk is substituted for nonfat dry milk, the processor 

shall draw down donated nonfat dry milk inventory only in an amount 

equal to the amount of concentrated skim milk, based on milk solids 

content, used to produce the end product. Processors shall ensure that 

an amount equivalent to 100 percent of the donated food provided to the 

processor under the NCP Program is physically contained in end products. 

Additional commodities required to account for loss of donated food 

during production shall be obtained from non-donated food.

    (7)(i) Only butter, cheese, corn grits, cornmeal, flour, macaroni, 

nonfat dry milk, peanut butter, peanut granules, roasted peanuts, rice, 

rolled oats, rolled wheat, shortening, vegetable oil, and spaghetti may 

be substituted as defined in Sec. 252.2 and such other food as FNS 

specifically approves as substitutable under paragraph (c)(7)(i)(A) of 

this section (substitution of meat and poultry items shall not be 

permitted).

    (A) Processors may request approval to substitute commercial foods 

for donated foods not listed in paragraph (c)(7)(i) of this section by 

submitting such request to FNS in writing and satisfying the 

requirements of paragraph (c)(7) of this section. FNS will notify the 

processor in writing of authorization to substitute commercial foods for 

donated foods not listed in paragraph (c)(7)(i) of this section and such 

authorization shall apply for the duration of all current contracts 

entered into by the processor pursuant to this section.

    (B) The processor shall maintain records to substantiate that it 

continues to acquire on the commercial market amounts of substitutable 

food consistent with their levels of non-NCP Program production and to 

document the receipt and disposition of the donated food.

    (C) FNS shall withhold deliveries of donated food from processors 

that FNS



[[Page 512]]



determines have reduced their level of non-NCP Program production 

because of participation in the NCP Program.

    (ii) When the processor seeks FNS approval to substitute donated 

nonfat dry milk with concentrated skim milk under paragraph (c)(7)(i)(A) 

of this section, an addendum must be added to the request which states:

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

in the concentrated skim milk;

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

milk:

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

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

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

as containing 96.5 percent milk solids;

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

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

concentration;

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

in the concentrated skim milk is as stated in the request;

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

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

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

    (E) A requirement that the contact value of donated food for a given 

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

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

weight ratio of the two foods.

    (iii) Substitution must not be made solely for the purpose of 

selling or disposing of the donated commodity in commercial channels for 

profit.

    (8) The processor shall be liable for all donated food provided 

under the agreement. The processor shall immediately report to FNS any 

loss or damage to donated food and shall dispose of damaged or out-of-

condition food in accordance with Sec. 250.7.

    (9) The processor shall submit to FNS monthly performance reports 

reflecting the sale and delivery of end products during the month.

    (i) The processor shall ensure that the monthly performance report 

is postmarked no later than the last day of the month following the 

month being reported. The processor shall identify the month of delivery 

for each sale reported. The sale and delivery of end products for any 

prior month may be included on the monthly performance report. The 

processor monthly performance report shall include:

    (A) The donated food inventory at the beginning of the reporting 

month;

    (B) Amount of donated food received from the Department during the 

reporting month;

    (C) Amount of donated food transferred to and/or from existing 

inventory;

    (D) A list of all recipient agencies purchasing end products and the 

number of units of end products delivered to each during the report 

month;

    (E) The net price paid for each unit of end product and whether the 

sale was made under a discount or refund system;

    (F) When the sale is made through a distributor, the name of the 

distributor;

    (G) The amount of inventory drawdown represented by reported sales; 

and

    (H) The donated food inventory at the end of the reporting month.

    (ii) In addition to reporting the information identified in 

paragraph (c)(9)(i) of this section, processors substituting 

concentrated skim milk for donated nonfat dry milk shall report the 

following information for the reporting period:

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

products sold to outlets which are not recipient agencies; and

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

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

agencies.

    (iii) At the end of each agreement period, there will be a final 90 

day reconciliation period in which processors may adjust NCP sales for 

any month.

    (10) The processor shall maintain complete and accurate records of 

the receipt, disposal and inventory of donated food including end 

products processed from donated food.

    (i) The processor shall keep production records, formulae, recipes, 

daily or



[[Page 513]]



batch production records, loadout sheets, bills of lading, and other 

processing and shipping records to substantiate the use of the donated 

food and the subsequent redelivery to an eligible recipient agency.

    (ii) The processor shall document that sales reported on monthly 

performance reports, specified in paragraph (c)(9) of this section were 

made only to eligible recipient agencies and that the normal wholesale 

price of the product was discounted or a refund payment made for the 

agreement value of the donated commodity.

    (iii) When donated food is commingled with commercial food, the 

processor shall maintain records which will permit an accurate 

determination of the donated commodity inventory.

    (iv) The processor shall make all pertinent records available for 

inspection and review upon request by FNS, its representatives and the 

General Accounting Office (GAO). All records must be retained for a 

period of three years from the close of the Federal fiscal year to which 

they pertain. Longer retention may be required for resolution of an 

audit or of any litigation.

    (11) The processor shall obtain, upon FNS request, Federal 

acceptance service grading and review of processing activities and shall 

be bound by the terms and conditions of the grading and/or review.

    (12) The processor shall indemnify and save FNS and the recipient 

agency free and harmless from any claims, damages, judgments, expenses, 

attorney's fees, and compensation arising out of physical injury, death, 

and/or property damage sustained or alleged to have been sustained in 

whole or in part by any and all persons whatsoever as a result of or 

arising out of any act or omission of the processor, his/her agents or 

employees, or caused or resulting from any deleterious substance, 

including bacteria, in any of the products produced from donated food.

    (13) The processor shall be liable for payment for all uncommitted 

food inventory remaining at agreement termination.

    (i) When agreements are terminated at the request of the processor 

or at FNS' request because there has been noncompliance on the part of 

the processor with the terms and conditions of the agreement, or if any 

right of FNS is threatened or jeopardized by the processor, the 

processor shall pay FNS an amount equal to the CCC unrestricted sales 

price, the cost CCC of replacement on the date the agreement is 

terminated, or the agreement value of donated commodities, whichever is 

highest, for the inventory, plus any expenses incurred by FNS.

    (ii) When the agreements are terminated at FNS' request where there 

has been no fault or negligence on the part of the processor, the 

processor shall pay FNS an amount equal to the CCC unrestricted sales 

price, the cost to CCC of replacement on the date the agreement is 

terminated, or the agreement value of the donated commodities, whichever 

is highest, for the inventory, unless FNS and the processor mutually 

agree on another value.

    (14) The processor shall not assign the processing contract or 

delegate any aspect of processing under a subcontract or other 

arrangement without the written consent of FNS. The subcontractor shall 

be required to become a party to the processing contract and conform to 

all conditions contained in that contract.

    (15) The processor shall comply fully with the provisions of the NCP 

agreement and all Federal regulations and instructions relevant to the 

NCP Program.

    (16) The processor shall label end products in accordance with Sec. 

250.15(j) and, when end products contain vegetable protein products, in 

accordance with 7 CFR part 210, 225, or 226 appendix A.

    (17) The processor shall return to FNS any funds received from the 

sale of donated food containers and the market value or the price 

received from the sale of any by-products of donated food or commercial 

food which has been substituted for donated food.

    (18) For any year in which a processor receives more than $250,000 

in donated food, the processor shall obtain an independent audit 

conducted by a Certified Public Accountant (CPA) for that year. 

Processors receiving $75,000 to $250,000 in donated food each year shall 

obtain an independent audit conducted by a CPA every two years and



[[Page 514]]



those receiving less than $75,000 in donated food each year shall obtain 

an independent audit conducted by a CPA every three years. Processors in 

the three year audit cycle shall move into the two year audit cycle when 

the value of donated food received reaches $75,000. If the Department 

determines that the audit is not acceptable or that the audit has 

disclosed serious deficiencies, the processor shall be subject to 

additional audits by OIG at the request of FNS.

    (i) Audits shall be conducted in accordance with the auditing 

provisions set forth under the Standards for Audit of Government 

Organizations, Programs, Activities and Functions, and the FNS Audit 

Guide for Multi-State Processors.

    (ii) The costs of the audits shall be borne by the processor.

    (iii) Audit findings shall be submitted by the processors to FNS.

    (iv) Noncompliance with the audit requirement contained in this part 

will render the processor ineligible to enter into another processing 

contract until the required audit has been conducted and deficiencies 

corrected.



[51 FR 23518, June 30, 1986, as amended at 52 FR 16369, May 5, 1987; 52 

FR 24978, July 2, 1987; 53 FR 16379, May 9, 1988; 53 FR 34014, Sept. 2, 

1988; 59 FR 62986, Dec. 7, 1994]