# Presentation: 194310

## Commodity Processing

- To process...or not to process?

## Then and Now

| Commodity | FY
1993 |  | FY
1998 |  | FY
2003 |  | FY
2006 |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|   | lbs | $ | lbs | $ | lbs | $ | lbs | $ |
| Turkey | 19% | 12% | 21% | 12% | 29% | 17% | 43% | 27% |
| Egg | 0% | 0% | 15% | 11% | 45% | 43% | 63% | 53% |
| Chicken | 29% | 22% | 67% | 61% | 72% | 56% | 74% | 54% |
| Pork | 14% | 13% | 18% | 12% | 35% | 24% | 57% | 45% |
| Beef | 12% | 12% | 25% | 24% | 49% | 50% | 56% | 55% |

**Notes:**
Standard Yield
Products with high manufacturing losses
		~ Poultry
		~ Potatoes and Tomatoes (Pilot) 
Yield set higher than can be achieved, so processor must add raw commercial ingredient	
Advantages
		~ Fixed yield
		~ Consistent inventory draw down
		~ Eliminates production variables

## Slide 3

## Slide 4

## School Year 2006-2007

| Commodity | Pounds | SY07 $ Diverted |
| --- | --- | --- |
| Red Meat | 100,314,100 | $137,527,486.00 |
| Poultry | 171,376,720 | $101,703,458.00 |
| Cheese | 70,086,145 | $89,265,048.00 |
| Other Group A | 109,713,080 | $14,569,425.00 |
| Other Group B | 26,369,120 | $7,932,274.00 |
|   | 477,859,165 | $350,997,691.00 |

## Assess Your Needs

- What does your organization need from the commodity program?
- What about your neighbors?
- What are your menu needs?
- Education and program guidance?

## Evaluate Your Operation

- _Financial Health_
- Are you in the red or in the black?
- What are your financial operational goals?
- How do you assess commodity value?
- Is commodity value a part of food cost or held out?
- _Operations_
- What sort of kitchen operations do you run?
- How do you factor in food safety?
- Are rising labor costs a concern?

## Evaluate State Commodity Model

- What methods does your State                    use to distribute commodities?
- What are the distribution fees?
- How does the State assess your needs?
- What are the limitations on processing?
- Does your State have administrative fees associated with processing?
- What are your distribution channels?

## Be Involved

- Build a relationship and work with the           State DA – provide feedback
- Build Co-ops and create purchasing blocks amongst RAs in your area
- Network with other States – keep up on trends
- Understand State operating constraints
- Understand the Federal regulations
- Use your State DA, State SNA Assoc., ACDA, and USDA as a support resource

## Advantages to Processing

- Spread your commodity dollars further throughout the year
- Plan for commodities, don’t react to them
- Get the products when and how you want them
- Utilize VPT methods to realize your commodity value quickly
- Product consistency, recognizable flavor profiles
- Brand recognition for your customers
- Food Safety – HACCP

## Brown Box Potatoes

  $12 + State distribution Fee

  Box is 30# finished weight

  Box comes limited times per year

  Have to store all cases up front or arrange for  storage

  When you run out, you have to find a commercial substitute

  Switching out products midstream = customer dissatisfaction

-   $12 + State distribution Fee
-   Box is 30# finished weight
-   Box comes limited times per year
-   Have to store all cases up front or arrange for  storage
-   When you run out, you have to find a commercial substitute
-   Switching out products midstream = customer dissatisfaction

## Processed Potatoes

6¢ per pound
55# of raw goods to make a finished 30# case
$12 commodity value buys you 200# of raw goods = 3.63 cases of finished goods
Get the product you want, when you want it and in exact quantities needed
Use your commercial distributor
VPT of commodity value reduces commercial price
Commercial product available when your run out of commodity inventory
menu consistency & customer satisfaction

- 6¢ per pound
- 55# of raw goods to make a finished 30# case
- $12 commodity value buys you 200# of raw goods = 3.63 cases of finished goods
- Get the product you want, when you want it and in exact quantities needed
- Use your commercial distributor
- VPT of commodity value reduces commercial price
- Commercial product available when your run out of commodity inventory
- menu consistency & customer satisfaction

## Commodities – A grocery store model

- Box of Cereal off sale = $4.00
*buying groceries with no bid*
- Same box of Cereal on sale = $3.00
*buying groceries with a bid*
- Coupon from the Sunday paper = $1.00 off
*subtracting out the commodity value*
- In-store double coupon = $.50 off
*negotiating deals for freight and distribution*
- Final cost of box of Cereal after all deals = $1.50

## Processing Agreements

**Processing Agreements**

- Multi-State Processors
- 1) National Processing Agreement (NPA)
- In-State Processors
- 2) State Master Agreements
- 3) State Agreements
- 4) Recipient Agency Agreement

## Slide 15

**Notes:**
WHY NPA?
ADMINSTRATIVE EASE
- Perpetual !

For State 
 National EPDS approval
 Less paper
 Federal clearance may streamline State clearance 
 No more Bond monitoring
For the Processor
Standardizes agreement 
Streamlines clearance – less paper to State 
A single bond

## Yield & Return

- _Fixed_
- 100% Yield
- Standard Yield (SY)
- Guaranteed Return (GR or GRO)
- SEPDS A

- _Variable_
- Guaranteed Minimum Return (GMR)
- SEPDS B

## 100% Yield

- Concept
- Processor must return 100% of the DF received back to contracting agency in the form of finished end products
- Processor must add equivalent commercially purchased food to make up the manufacturing loss
- Advantages
-    Easiest of methods
-    Fixed inventory drawdown

## Guaranteed Return 

- Concept
- Processor guarantees a fixed number of cases will be produced using a fixed amount of meat
- Guaranteed (average) yield = fixed draw down
- Advantages
- AMS certification & monitoring of National MPR
- No grading certificates
- No minimum to verify

## Standard Yield

- Concept
- Processor guarantees a fixed number of cases will be produced using a fixed amount of commodity
- Best for foods with high manufacturing losses
- Advantages
- No variation in delivery units
- Productions variables eliminated or replaced with fixed values
- Guaranteed cases and draw down per case

## Guaranteed Minimum Return

- Concept
- Minimum amount of finished end product to be returned based on the amount of raw DF supplied to the processor
- Traditionally red meat & poultry
- Advantages
- Poultry: wing credits & buybacks
- Over yield

## Commodity Value

- November 15 Commodity File
- Cheese is 33 month average
- Used to determine:
- Refunds or discounts
- Value of surety bond, escrow or LOC
- Costs of replacement for production or commodity losses
- Failure to meet GMR

## Slide 22

## Slide 23

## Value-Pass-Through
&
Fee-for-Service

**&**
**Fee-for-Service**

## Types of Sale

-          _Direct_
- Sales made directly from the processor to the DA or RA

-         _Indirect_
- Sales are made from the processor to a commercial distributor

## Refund Sales

- _Direct Refund_
- Processor invoices RA at gross commercial price
- RA applies for a refund

- _Indirect Refund Sale_
- Processor sells commercial to distributor
- Distributor sells commercial to RA
- RA applies for refund

- Inventory is reduced when processor pays the refund

## Discount Sales

- _Direct Discount_
- Processor bills        RA net price
- Inventory reduced when RA billed

- _Indirect Discount_
- “Hybrid”
- Processor sells commercial to distributor, who sells net to RA
- Distributor applies for refund from processor
- Inventory reduced when refund is paid

- Requires Sales Verification

## Discount Sales

- Indirect Discount Through a Distributor
- “Net Off Invoice” or NOI
- Nationally approved VPT system
- Allows the distributor’s velocity report to serve as the refund application
- Requires identical commodity & commercial end products
- Inventory reduced when processor receives velocity report
- Requires sales verification

## STATE DETERMINES WHAT METHODS OF VPT WILL BE USED IN THE STATE

Is NOI good for the State?  
Is NOI good for recipients?  

- Is NOI good for the State?
- Is NOI good for recipients?

- Net Off Invoice

## NOI – Considerations?

- Impact on State warehousing?
- Will delivery costs for non-processed commodities increase?
- What amendments need to be made to the processing agreement, warehousing contract, or procurement documents?
- What training/guidance does the State need to make available to RAs?
- How do you compare NOI with other VPT systems in procurement?

## NOI – Considerations 

- Are local distributors automated?
- Are local distributors interested in doing NOI?
- Should this be the only VPT system allowed for the processor?
- Will the State delegate sales verification to the processor as allowed by 250.19(b)(2)(vi)?
- How will the State do the 10% re-verification of reported sales?

## FEE FOR SERVICE

- This is the price per case a processor charges to convert raw commodities into a finished product.
- The fee could be:
- FOB Plant
- FOB Destination
- Delivered
- Inventory reduction occurs upon billing RA or DA

## Inventory Controls

- State monitors processor inventory
- Processors should only be drawing down what they can prove was produced & delivered
- Six month inventory limit
- No further distribution with excessive inventories

## Excess Inventory

**Common Causes**
- Carryover inventory
- Deliveries late in the school year
- States failing to monitor flow
- Schools diverting commodity to a processor then failing to use inventory
- Schools failing to apply for rebates in a timely manner or not at all

## Excess Inventory

**What to do?**
- Give processor written permission to maintain excess inventory
- Transfer to another school
- Transfer to another processor
- Transfer to DA that can use inventory
- Rare instances: processor can “buy down” excess inventory

## School Allocation Controls

- “Best guess” for initial diversion
- Request destination changes
- “Paper transfer” between processors
- Track processors and balances
- Understand State policies
- Carryover inventory
- Order changes and transfers
- Develop a strategy
- Front-loading: late delivery for use early in the next SY
- “Banking”: used over the course of 1-2 school years

## Negative Inventory

- Often due to food order delays
- State and processor work to resolve problem
- Can offset negative inventory upon receipt of donated food
- Should be  avoided
- Processor stop selling at discounted $
- Processors own risk, no guarantee of replacement

## To Process or Not To Process?

- Assess your needs
- Evaluate your operation
- Financial Health
- Operations
- Evaluate State Commodity Model

-   BE INVOLVED