50250 Federal Register / Vol. 71, No. 164 / Thursday, August 24, 2006 / Proposed Rules 

DEPARTMENT OF AGRICULTURE 

Food and Nutrition Service 

7 CFR Part 250 

RIN 0584–AD76 

Revisions and Clarifications in 

Requirements for the Processing of 

Donated Foods 

AGENCY: Food and Nutrition Service, 

USDA. 

ACTION: Proposed rule. 

SUMMARY: This rule proposes to revise 

and clarify requirements for the 

processing of donated foods, in order to 

incorporate processing options tested in 

demonstration projects, to more 

effectively ensure accountability for 

donated foods provided for processing, 

and to streamline current reporting and 

review requirements. Most significantly, 

it would require multi-State processors 

to enter into National Processing 

Agreements to process donated foods 

into end products, and would permit 

processors to substitute donated beef 

and pork with commercially purchased 

beef and pork of U.S. origin and of equal 

or better quality than the donated food. 

The rule would also rewrite regulatory 

provisions in plain language, to make 

them easier to read and understand for 

the general public. 

DATES: To be assured of consideration, 

comments must be received on or before 

November 22, 2006. 

ADDRESSES: The Food and Nutrition 

Service invites interested persons to 

submit comments on this proposed rule. 

You may submit comments, identified 

by RIN number 0584–AD76, by any of 

the following methods: 

E-mail: Send comments to 

Robert.Delorenzo@fns.usda.gov. Include 

RIN number 0584–AD76 in the subject 

line of the message. 

Fax: Submit comments by facsimile 

transmission to (703) 305–2420. Disk or 

CD–ROM: Submit comments on disk or 

CD–ROM to Lillie F. Ragan, Assistant 

Branch Chief, Policy Branch, Food 

Distribution Division, Food and 

Nutrition Service, U.S. Department of 

Agriculture, Room 500, 3101 Park 

Center Drive, Alexandria, Virginia 

22302–1594. 

Mail: Send comments to Lillie F. 

Ragan at the above address. 

Hand Delivery or Courier: Deliver 

comments to the above address. 

Federal eRulemaking Portal: Go to 

http://www.regulations.gov. Follow the 

online instructions for submitting 

comments. 

Further information on the 

submission of comments, or the review 

of comments submitted, may be found 

under SUPPLEMENTARY INFORMATION, Part 

III, Procedural Matters. 

FOR FURTHER INFORMATION CONTACT: 

Lillie F. Ragan at the above address or 

telephone (703) 305–2662. You may also 

contact Robert DeLorenzo by e-mail at 

Robert.Delorenzo@fns.usda.gov. 

SUPPLEMENTARY INFORMATION:

I. Background 

The Department of Agriculture (the 

Department or USDA) provides donated 

foods to State distributing agencies for 

distribution to school food authorities 

participating in the National School 

Lunch Program (NSLP), and to recipient 

agencies in other child nutrition or food 

distribution programs. In accordance 

with Federal regulations in 7 CFR Part 

250, distributing agencies may provide 

the donated foods to commercial 

processors for processing into end 

products that are more suitable for use 

in school lunch programs or other food 

programs. The regulations ensure that 

State and local agencies, and program 

recipients, receive the full benefit of the 

donated foods provided to such 

processors for processing into end 

products. Distributing agencies must 

enter into agreements with processors to 

ensure compliance with the 

requirements in Federal regulations. 

Over the last 30 years or so, the 

quantity and variety of donated foods 

provided in the National School Lunch 

Program has increased substantially. 

Consequently, the processing of the 

donated foods into more useful end 

products has become an integral part of 

the successful operation of the school 

lunch program. In the last several years, 

the Department’s Food and Nutrition 

Service (FNS) has taken a number of 

steps to facilitate the use of donated 

foods by commercial processors in the 

interest of providing more efficient and 

effective service to school food 

authorities and other recipient agencies. 

Most of these changes have been 

implemented as a result of discussions 

with State and local program operators, 

processors, and industry consultants. 

In a final rule published in the 

Federal Register on October 23, 2002 at 

67 FR 65011, 7 CFR Part 250 was 

amended to expand the types of donated 

foods that processors were permitted to 

substitute with commercially purchased 

foods without prior FNS approval. The 

rule permitted processors to substitute 

donated fruits, vegetables, and eggs with 

commercially purchased foods of the 

same generic identity, of U.S. origin, 

and of equal or better quality than the 

donated foods. Additionally, limited 

substitution of donated poultry was 

permitted, in accordance with the 

processor’s approved plan. Substitution 

allows processors to provide finished 

end products to school food authorities 

in a more efficient manner, which 

permits the schools to better utilize the 

donated foods in the school food 

service. Only the substitution of 

donated beef and pork is currently 

prohibited. 

Since June 30, 2001, FNS has 

conducted a demonstration project to 

allow selected processors to substitute 

commercially purchased beef and pork 

for donated beef and pork, in 

accordance with an approved plan. The 

commercial product must be of U.S. 

origin, and of equal or better quality 

than the donated food. Since USDA’s 

purchase specifications for ground beef 

and pork are more stringent than 

commercially available ground beef and 

pork, few processors have chosen to 

participate in the demonstration project. 

However, FNS has concluded that all 

processors should have the option to 

substitute commercial beef and pork, as 

long as they can meet the same 

specifications required of donated beef 

and pork. 

In July 2004, FNS initiated a 

demonstration project to allow multiState processors to submit end product 

data schedules to FNS for review and 

approval at the national level, rather 

than submitting them to State 

distributing agencies for their approval. 

End product data schedules indicate the 

required yield of donated foods that 

must be obtained in their processing 

into end products. Their review and 

approval, however, is a time and laborintensive activity for State distributing 

agencies. Since processors are not 

required to submit end product data 

schedules for approval in each State in 

which they operate, national approval 

under the demonstration project has 

reduced the time and labor burden 

considerably for both distributing 

agencies and processors. 

In conjunction with the 

demonstration project allowing national 

approval of end product data schedules, 

FNS has provided multi-State 

processors with the option of signing 

National Processing Agreements. Under 

the National Processing Agreement, FNS 

monitors the processor’s national 

inventory of donated foods, and holds 

and manages the processor’s 

performance bond or letter of credit, 

which protects the value of the 

processor’s donated food inventories. 

The monitoring and protection of 

donated food inventories held by 

processors at the national level has 

further reduced the burden on 

distributing agencies. FNS has entered 


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Federal Register / Vol. 71, No. 164 / Thursday, August 24, 2006 / Proposed Rules 50251 

into National Processing Agreements 

with an increasing number of multiState processors since the initiation of 

the demonstration project. Under their 

State processing agreements (called 

State Participation Agreements), 

distributing agencies select the 

processor’s nationally approved end 

products for sale in the State, and may 

include other State-specific processing 

requirements. 

The regulatory amendments proposed 

in this rule would incorporate into 7 

CFR Part 250 the processing options 

provided under the demonstration 

projects described above. They would 

also more effectively ensure 

accountability for donated foods 

provided for processing while 

streamlining current reporting and 

review requirements imposed on State 

distributing agencies and processors. 

Most significantly, the rule proposes to: 

(1) Permit substitution of donated beef 

and pork with commercial beef and 

pork of U.S. origin, and of equal or 

better quality than the donated foods; 

(2) Require multi-State processors to 

sign National Processing Agreements 

with FNS, and to submit end product 

data schedules to the Department for 

approval at the national level; 

(3) Require multi-State processors to 

submit a performance bond or letter of 

credit to FNS to protect the value of the 

processors’ donated food inventories; 

(4) Require in-State processors to 

obtain independent Certified Public 

Accountant (CPA) audits every three 

years, and revise upward the donated 

food value thresholds that determine the 

required frequency of such audits for 

multi-State processors; and 

(5) Remove the requirements that the 

distributing agency conduct an on-site 

review of in-State processors every two 

years, and develop a system to verify 

sales of end products through 

commercial distributors. 

As discussed below, we propose to 

amend current §§ 250.3, 250.13, 250.16, 

250.17, 250.19, and 250.24, and to 

completely revise § 250.18, and § 250.30 

under Subpart C, Processing and 

Labeling of Donated Foods. The revision 

of Subpart C would break out the single 

section in that subpart into 10 new 

sections to more clearly present the 

specific processing requirements. Lastly, 

we propose to rewrite all revised 

sections in plain language, to make 

them easier to read and understand for 

the general public. The proposed 

changes to 7 CFR Part 250 are discussed 

in detail below. 

II. Discussion of the Rule’s Provisions 

A. Definitions, § 250.3 

Due to developments in food 

distribution programs, and for the 

purpose of clarification, we propose to 

remove, revise, and add definitions in 

current § 250.3 relating to processing of 

donated foods. We propose to remove 

the definitions of ‘‘Contract value of the 

donated foods’’, ‘‘Contracting agency’’, 

‘‘Discount system’’, ‘‘Fee-for-service’’, 

‘‘Refund’’, ‘‘Refund application’’, 

‘‘Refund system’’, and ‘‘Substituted 

food’’. The proposed definition of 

‘‘Processing agreement value’’ would 

replace the current definition of 

‘‘Contract value of the donated foods’’. 

The term ‘‘contracting agency’’ would 

be replaced throughout the proposed 

regulatory provisions with the specific 

agency (i.e., distributing and/or 

recipient agency) that may enter into a 

processing agreement. The meaning of 

the other terms being removed is clear 

in the context of the proposed 

regulatory provisions, and no longer 

require separate definitions. 

We propose to revise the definitions 

of ‘‘Distributor’’, ‘‘Multi-State 

processor’’ and ‘‘Substitution’’. The 

revised definition of ‘‘Distributor’’

would clarify that it is a commercial 

enterprise that may sell and/or deliver 

finished end products or store and 

distribute donated foods to distributing 

or recipient agencies. We propose to 

revise the current definition of ‘‘MultiState processor’’ only to indicate that 

such a processor may operate in 

accordance with an agreement with a 

distributing or recipient agency. 

Lastly, we propose to revise the 

definition of ‘‘Substitution’’ to simply 

indicate that it is the use of 

commercially purchased foods in place 

of donated foods, in accordance with 

the requirements in 7 CFR Part 250, as 

we propose to revise them in this rule. 

The current requirement that 

substitution of donated foods must be 

with commercial foods of the same 

generic identity, of domestic origin, and 

of equal or better quality than the 

donated food, would be included in the 

new § 250.34(a), as proposed in this 

rule. 

The current provision for the 

substitution of donated nonfat dry milk 

with concentrated skim milk would be 

removed. Nonfat dry milk is a food 

commonly purchased by the 

Department under price support 

legislative authority and donated for use 

in food assistance programs. Hence, 

substitution of this donated food is 

rarely made at the current time, and is 

not encouraged by the Department. 

Additionally, it is a very complex 

substitution to make, as the processor 

must assure that the milk solids in the 

skim milk fully replace the quantity of 

milk solids in the substituted nonfat dry 

milk. The current stipulation that 

substitution must meet the 100 percent 

yield requirement would be removed, as 

processing yield requirements for 

donated foods, as well as commercially 

purchased foods substituted for them, 

would be included in the new § 250.33. 

The provision describing the limited 

substitution of poultry would be 

removed. As proposed in the new 

§ 250.34, we would allow substitution of 

donated poultry under the same 

conditions as substitution of other 

donated foods, with the exception of 

backhauled product. All proposed 

requirements for the substitution of 

donated foods are fully discussed later 

in section II.H.5 of the preamble. 

We propose to add definitions of 

‘‘Backhauling’’, ‘‘Commingling’’, ‘‘End 

product data schedule’’, ‘‘In-State 

processor’’, ‘‘National Processing 

Agreement’’, ‘‘Processing agreement 

value’’, ‘‘Recipient Processing 

Agreement’’, ‘‘Replacement value’’, ‘‘7 

CFR Part 3052’’, ‘‘Split shipment’’, 

‘‘State Participation Agreement’’, and 

‘‘State Processing Agreement’’. A 

definition of ‘‘Backhauling’’ would 

describe a means of delivery of donated 

food to a processor that is sometimes 

used by recipient agencies. A definition 

of ‘‘Commingling’’ would describe the 

common storage of donated foods with 

commercially purchased foods, as 

currently permitted for processors and 

most recipient agencies. A definition of 

‘‘End product data schedule’’ would 

convey the important function of this 

document in describing the processing 

of donated foods into finished end 

products. A definition of ‘‘In-State 

processor’’ would help the reader 

distinguish such an enterprise from a 

multi-State processor. Definitions of 

‘‘National Processing Agreement’’, 

‘‘Recipient Processing Agreement’’, 

‘‘State Participation Agreement’’, and 

‘‘State Processing Agreement’’ would 

help the reader understand the different 

types of processing agreements 

permitted. These processing agreements 

are further described in the new 

§ 250.30. A definition of ‘‘Processing 

agreement value’’ would clarify the 

donated food value that must be used by 

processors in crediting for donated 

foods in finished end products. A 

definition of ‘‘7 CFR Part 3052’’ would 

identify the Departmental regulations 

relating to audit requirements for State 

and local governments and nonprofit 

organizations that receive Federal 

grants. A definition of ‘‘Replacement 

value’’ would clarify the donated food 


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50252 Federal Register / Vol. 71, No. 164 / Thursday, August 24, 2006 / Proposed Rules 

value that must be used by processors 

to ensure compensation for donated 

foods lost in processing or other 

activities, and would distinguish it from 

the processing agreement value. A 

definition of ‘‘Split shipment’’ would 

describe a commonly used means of 

delivering donated foods to distributing 

or recipient agencies, or to processors. 

B. Distribution and Control of Donated 

Foods, § 250.13 

We propose to amend current 

§ 250.13(c), which describes the timing 

of transfer of title to donated foods, and 

the agency to which title is transferred. 

Currently, title to donated foods 

transfers to the distributing agency upon 

its acceptance of donated foods at the 

time and place of delivery. However, in 

many cases, recipient agencies receive 

direct shipments of donated foods from 

USDA vendors, bypassing the 

distributing agency. In such cases, title 

should pass directly to the recipient 

agency. Hence, we propose to state that 

title to donated foods passes to the 

distributing or recipient agency, as 

appropriate, at the time and place of 

delivery. However, we also propose to 

add an exception to the timing of title 

transfer, in accordance with the 

requirements under National Processing 

Agreements proposed in this rule. In the 

new § 250.32(a), we are proposing to 

require a multi-State processor to 

provide a performance bond or letter of 

credit to FNS to protect the value of the 

processor’s donated food inventory, in 

accordance with its National Processing 

Agreement. However, unless the 

Department retains title to the donated 

foods held by such a processor, FNS 

would not have the authority to call in 

the bond if the processor failed to 

comply with processing requirements. 

Hence, we propose to state that title to 

donated foods provided to a multi-State 

processor, in accordance with its 

National Processing Agreement, 

transfers to the distributing or recipient 

agency, as appropriate, upon the 

acceptance of finished end products at 

the time and place of delivery. We 

propose to stipulate that, 

notwithstanding transfer of title, the 

distributing agency must ensure that 

donated foods and end products are 

used in accordance with the 

requirements of 7 CFR Part 250. 

C. Maintenance of Records, § 250.16 

In current § 250.16(a)(3), distributing 

agencies are required to maintain 

records of refusal of donated foods by 

school food authorities, if a distributing 

agency permits those school food 

authorities to select a limited variety of 

donated foods from the full list of 

donated foods that USDA has made 

available for distribution. Such an ‘‘offer 

and refusal’’ system is described in 

current § 250.48(f). However, in 

accordance with a proposed rule 

published in the Federal Register on 

June 8, 2006 at 71 FR 33344, we would 

remove the ‘‘offer and refusal’’ system of 

ordering or selecting donated foods and 

require that the distributing agency 

permit school food authorities to order 

from the full list of available foods, and 

to distribute all such foods to them that 

can be distributed in a cost-effective 

manner. Under that proposed revision, 

refusal of donated foods, and records 

documenting such refusals, would be 

obsolete. Hence, we propose to remove 

current § 250.16(a)(3). 

In current § 250.16(a)(4), processors, 

food service management companies, 

warehouses, and other entities must 

maintain records of receipt, distribution, 

storage, and inventory of donated foods. 

Processors must also maintain records 

such as formulas, recipes, production 

records, and receipt of shipments to 

document their use of donated foods. As 

discussed later in the preamble, we are 

proposing to include specific 

recordkeeping requirements for 

processors in the new § 250.37(d), and 

in the proposed rule published in the 

Federal Register on June 8, 2006 at 71 

FR 33344, we proposed to include 

specific recordkeeping requirements for 

food service management companies. 

Hence, we propose to revise this section 

to state that processors and food service 

management companies must comply 

with the applicable recordkeeping 

requirements in 7 CFR Part 250, and 

with any other recordkeeping 

requirements included in their 

agreements or contracts. We also 

propose to require that storage facilities 

and distributors maintain records 

documenting the receipt, distribution, 

inventory, and disposal of donated 

foods or end products sufficient to 

ensure compliance with requirements in 

7 CFR Part 250, and with any other such 

requirements in their agreements or 

contracts with distributing or recipient 

agencies. The specific types of records 

that such entities would have to 

maintain would depend on the agency 

with which they have a contract or 

agreement, and the specific donated 

food activities they are conducting 

under the contract or agreement. 

In accordance with the proposed 

removal of § 250.16(a)(3), we would 

redesignate current § 250.16(a)(4), (a)(5), 

and (a)(6), as § 250.16(a)(3), (a)(4), and 

(a)(5), respectively. 

D. Reports, § 250.17 

Current § 250.17(b) and (c) contains 

reporting requirements to ensure 

processors’ compliance with 

requirements in 7 CFR Part 250. In 

current § 250.17(b), the distributing 

agency must submit a report of 

processors’ inventories to the FNS 

Regional Office on a quarterly basis (this 

requirement is also contained in current 

§ 250.30(o)). In current § 250.17(c), 

processors must submit monthly 

performance reports to the distributing 

agency. We propose to remove 

§ 250.17(b). FNS Regional Offices do not 

currently review reports of processors’

donated food inventories. The 

distributing agency is responsible for 

monitoring such inventories through the 

review of processors’ performance 

reports, and, in accordance with current 

§ 250.30(n)(1), to ensure that processors 

do not maintain excessive inventories. 

As discussed in section II.H.8 of the 

preamble, we are proposing to include 

more specific reporting requirements for 

processors in the new § 250.37. Under 

the proposals, multi-State processors 

would be required to submit monthly 

reports of their national donated food 

inventories to FNS Headquarters for 

review. Accordingly, we propose to 

revise current § 250.17(c) (redesignated 

as paragraph (b) by this rule) to require 

processors to submit performance 

reports and other supporting 

documentation, as required by the 

distributing agency or by FNS. In 

accordance with the removal of 

§ 250.17(b), we would redesignate 

current § 250.17(c), (d), and (e), as 

§ 250.17(b), (c), and (d), respectively. 

We propose to remove current 

§ 250.17(f), which stipulates that the 

date shown on a report submitted by 

facsimile machine may serve as the 

submission date. 

E. Audits, § 250.18 

Currently, § 250.18 describes audit 

requirements for distributing and 

recipient agencies and for multi-State 

processors. We propose to revise this 

section to clarify audit requirements for 

distributing and recipient agencies, to 

include new audit requirements for inState processors, and to amend audit 

requirements for multi-State processors. 

In current § 250.18(a), fiscal matters 

must be reviewed in audits conducted 

under the Single Audit Act, and in 

accordance with Departmental 

regulations in 7 CFR Part 3015. 

However, the current Departmental 

regulations establishing audit 

requirements for State and local 

governments and nonprofit 

organizations that receive Federal grants 


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Federal Register / Vol. 71, No. 164 / Thursday, August 24, 2006 / Proposed Rules 50253 

are contained in 7 CFR Part 3052, which 

incorporates requirements in OMB 

Circular A–133. In accordance with 7 

CFR Part 3052 and OMB Circular A–

133, a State or local government or 

nonprofit organization that expends at 

least $500,000 in Federal awards in a 

school or fiscal year must obtain a single 

audit for that year. A program-specific 

audit may be substituted for the single 

audit if the auditee operates only one 

Federal program, or one recognized 

cluster of programs (e.g., National 

School Lunch, School Breakfast, and 

Summer Food Service Programs). A 

State or local government or nonprofit 

organization that expends less than 

$500,000 in Federal awards in a year is 

not required to obtain an audit for that 

year. In determining if an audit is 

required, the value of donated foods 

must be considered, along with other 

Federal expenditures. 

We propose to include these audit 

requirements in the new § 250.18(a), as 

they apply to distributing and recipient 

agencies, and to reference the 

Departmental regulations in 7 CFR Part 

3052. We also propose to require that 

the donated food values established by 

the distributing agency to credit a 

recipient agency’s donated food 

assistance level, in accordance with 

current § 250.13(a)(5), must be used. We 

would indicate that, for a recipient 

agency utilizing a single inventory 

management system, the value of 

donated foods received in a year must 

be considered, rather than the value of 

donated foods used or distributed. 

Under single inventory management, 

donated foods are commingled with 

commercially purchased foods, and the 

amount or value used or distributed 

may not be discernible. 

The requirements contained in 7 CFR 

Part 3052 and OMB Circular A–133 do 

not apply to commercial enterprises 

providing goods and services to 

distributing or recipient agencies in 

accordance with agreements or 

contracts. However, in accordance with 

current § 250.18(b), multi-State 

processors must obtain an independent 

CPA audit at a frequency determined by 

the value of the donated foods they 

receive for processing in a year. 

Currently, a multi-State processor must 

obtain an independent CPA audit for 

any year in which it receives more than 

$250,000 in donated foods; every two 

years, if it receives $75,000 to $250,000 

in donated foods each year; and every 

three years, if it receives less than 

$75,000 in donated foods each year. 

Such audits must be paid for by the 

processor. 

In-State processors are not currently 

required to obtain an independent CPA 

audit. In order to ensure their 

compliance with program requirements, 

the distributing agency must conduct an 

on-site review of such processors at 

least once every two years, in 

accordance with current 

§ 250.19(b)(1)(iii). However, the 

performance of on-site reviews is a 

costly and time-consuming exercise for 

distributing agencies. Hence, we 

propose instead to require in-State 

processors to obtain independent CPA 

audits as well, and, as discussed in 

section II.F of the preamble, to remove 

the on-site review requirement currently 

imposed on the distributing agency for 

such processors. 

In the new § 250.18(b), we propose to 

require that all in-State processors 

obtain an independent CPA audit in the 

first year that they receive donated 

foods for processing. We propose to 

require that, after the first year, in-State 

processors obtain an independent CPA 

audit every three years. As currently 

required for multi-State processors, we 

propose to require that in-State 

processors pay the cost of the audit. We 

propose to amend the current audit 

requirement for multi-State processors 

by requiring that a multi-State processor 

obtain an independent CPA audit in 

each of the first three years that it 

receives donated foods for processing. 

After the first three years, a multi-State 

processor must obtain an audit at a 

frequency determined by the average 

value of donated foods received for 

processing per year, as currently 

required. However, we propose to revise 

upward the current thresholds for 

determining the required frequency of 

such audits to reflect the much larger 

volume of donated foods provided to 

such processors for processing over the 

last several years. Hence, we propose to 

require a multi-State processor to obtain 

an independent CPA audit: 

(1) Annually, if it receives, on 

average, more than $5,000,000 in 

donated foods for processing per year; 

(2) Every two years, if it receives, on 

average, between $1,000,000 and 

$5,000,000 in donated foods for 

processing per year; and 

(3) Every three years, if it receives, on 

average, less than $1,000,000 in donated 

foods for processing per year. 

As in audits of distributing and 

recipient agencies, we propose to 

require that the donated food values 

established by the distributing agency in 

accordance with current § 250.13(a)(5) 

must be used to determine if an audit is 

required. We also propose to clarify that 

audits must determine processor 

compliance with the requirements in 

this part, and must be conducted in 

accordance with the FNS Audit Guide 

for Processors. However, we propose to 

remove the current stipulation that, at 

the discretion of FNS, auditors will be 

required to attend training sessions 

conducted by the Department. 

In the new § 250.18(c), we propose to 

indicate that a distributing or recipient 

agency must submit reports and 

corrective action plans, and undertake 

corrective actions in response to the 

audit, in accordance with the 

requirements in 7 CFR Part 3052. We 

propose to clarify that, by December 

31st of each year in which an audit is 

required, a multi-State processor is 

responsible for ensuring that a copy of 

the audit is provided to FNS, while an 

in-State processor must ensure that a 

copy of the audit is provided to the 

distributing agency. We also propose to 

include the requirement in current 

§ 250.18(b)(6) that the processor provide 

verification to FNS, or the distributing 

agency, as appropriate, that all 

deficiencies identified in the audit have 

been corrected, or provide a corrective 

action plan with timelines for correcting 

all deficiencies identified in the audit. 

In the new § 250.18(d), we propose to 

indicate that a distributing or recipient 

agency is subject to sanctions for failure 

to obtain the required audit, or for 

failure to correct deficiencies identified 

in audits. Such sanctions may include 

the withholding, suspension, or 

termination of a Federal award. In 

current § 250.18(b)(5), noncompliance 

with audit requirements makes the 

processor ineligible to continue to 

receive donated foods for processing. 

We propose to state that FNS may 

terminate a processor’s National 

Processing Agreement, or prohibit the 

further distribution of donated foods to 

a processor, for its failure to obtain the 

required audit, or for failure to correct 

the deficiencies identified in the audit. 

We propose to state that a distributing 

or recipient agency may immediately 

terminate an agreement with a 

processor, and must not extend or 

renew such an agreement, for the same 

reasons, in accordance with the new 

§ 250.38(e). 

In current § 250.18(a), the 

Department, the Comptroller General of 

the United States, or any of their 

authorized representatives, may conduct 

audits or inspections of distributing, 

subdistributing, or recipient agencies, or 

with commercial enterprises with which 

they have agreements or contracts, to 

assure compliance with the 

requirements of this part. We propose to 

maintain that and move it to new 

§ 250.18(e). 


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50254 Federal Register / Vol. 71, No. 164 / Thursday, August 24, 2006 / Proposed Rules 

F. Reviews, § 250.19 

As previously described, we propose 

to remove current § 250.19(b)(1)(iii), 

which requires the distributing agency 

to perform an on-site review of all inState processors at least once every two 

years. In accordance with the removal of 

§ 250.19(b)(1)(iii), we would redesignate 

current § 250.19(b)(1)(iv) and (b)(1)(v), 

as § 250.19(b)(1)(iii) and (b)(1)(iv), 

respectively. 

Currently, in § 250.19(b)(2), the 

distributing agency must develop a 

system to verify sales of end products 

when a processor has provided end 

products to a distributor, and the 

distributor sells such end products to 

recipient agencies at a discount. The 

sales verification system must include a 

statistically valid sample of such sales 

over a six-month period. If the 

distributing agency delegates this sales 

verification requirement to the 

processor, it must select a subsample of 

the processor’s findings, and reverify 

them. Current regulations also require 

the distributing agency to submit sales 

verification findings to the FNS 

Regional Office. The purpose of such 

sales verification is to assure that the 

distributor has sold the requisite 

quantity of end products to recipient 

agencies. 

We propose to remove § 250.19(b)(2), 

and the requirement that the 

distributing agency develop a sales 

verification system, as described above. 

In the new §§ 250.36(d) and 250.37(d), 

as described later in the preamble, we 

are proposing to require the processor to 

ensure that the distributor notify it, on 

a monthly basis, of its sale of end 

products to recipient agencies at a 

discount, or under a fee-for-service, 

through automated sales reports, or 

other electronic or written submission, 

and to require the processor to maintain 

records of such notification. These 

records would be available for review by 

auditors, in conducting the audits 

required in the proposed § 250.18. We 

are also proposing, in the new 

§ 250.37(f), to require recipient agencies 

to maintain records of the receipt of end 

products from processors or 

distributors. These records would also 

be available for review by the 

distributing agency or other parties, 

including auditors. Hence, in place of 

the current burden imposed on the 

distributing agency to develop a system 

to verify end product sales, we would 

ensure, through appropriate 

documentation, that such sales have 

been made, and that recipient agencies 

have received the end products that 

they are due. The distributing agency 

may still require, at its option, that the 

processor submit documentation to 

support information included in the 

processor’s performance report, 

including sales of end products to 

recipient agencies. The distributing 

agency may also contact recipient 

agencies to ensure receipt of end 

products. 

In accordance with the removal of 

§ 250.19(b)(2), we would redesignate 

current § 250.19(b)(3), (b)(4), (b)(5), and 

(b)(6), as § 250.19(b)(2), (b)(3), (b)(4), 

and (b)(5), respectively. However, we 

propose to remove the last sentence in 

the redesignated § 250.19(b)(2), which 

requires the distributing agency to 

submit a copy of the processor review 

report to the FNS Regional Office. 

G. Distributing Agency Performance 

Standards, § 250.24 

In current § 250.24(g), distributing 

agencies must provide for the 

processing of donated foods, in 

accordance with current § 250.30, and 

must inform recipient agencies of the 

processing options available to them. 

Distributing agencies must also test end 

products, prior to entering into a 

processing agreement, or may allow 

recipient agencies to test end products, 

and must monitor acceptability of end 

products. We propose to retain the 

current requirements in the revised 

§ 250.24(g), but to reference 

requirements under Subpart C, and to 

clarify that the distributing agency must 

ensure that recipient agencies are aware 

of the processing options available to 

them. Most of the information on 

processing is available on the FNS Web 

site or from other readily available 

sources, as indicated in the new 

§ 250.39(b). 

H. Subpart C—Processing of Donated 

Foods 

As previously mentioned, we propose 

to completely revise current Subpart C, 

Processing and Labeling of Donated 

Foods, which currently contains only 

§ 250.30. In revising Subpart C, we 

would restructure it into 10 new 

sections, to more clearly present the 

specific processing requirements, and 

would rewrite them in plain language. 

We propose to include the requirements 

for specific processing activities more or 

less in the order in which they occur; 

i.e., entering into processing 

agreements, processing of donated foods 

into end products, sale of end products, 

submission of reports, etc. We also 

propose to change the heading of 

Subpart C to Processing of Donated 

Foods. The new sections proposed 

under the revised Subpart C include the 

following: 

250.30, Types of processing 

agreements. 

250.31, Procurement requirements. 

250.32, Protection of donated food 

value. 

250.33, Processing yields of donated 

foods. 

250.34, Substitution of donated foods. 

250.35, Storage, inspection, quality 

control, and inventory management. 

250.36, End product sales and 

crediting for the value of donated foods. 

250.37, Reports, records, and reviews 

of processor performance. 

250.38, Provisions of agreements. 

250.39, Miscellaneous provisions. 

1. Types of Processing Agreements, 

§ 250.30 

In the new § 250.30, we propose to 

state clearly why donated foods are 

provided to processors for processing, 

and to describe the different types of 

processing agreements permitted, 

including National, State, and Recipient 

Processing Agreements. However, we 

propose to include the specific 

provisions required for each type of 

agreement in the new § 250.38, as the 

reason for their inclusion will only be 

clear with an understanding of the 

processing requirements contained in 

the preceding sections. 

In the new § 250.30(a), we propose to 

describe the benefit of providing 

donated foods to a processor for 

processing into end products, and to 

clarify that a processor’s use of a 

commercial facility to repackage 

donated foods, or to use donated foods 

in the preparation of meals, is also 

considered processing in 7 CFR Part 

250. 

In current § 250.30(b), a distributing 

agency may contract with a processor to 

process donated foods, or may permit 

subdistributing or recipient agencies to 

contract with processors. In current 

practice, such contracting is performed 

under agreements entered into between 

the parties; hence, in this rule, we use 

the term agreement, rather than 

contract, to describe any legal compact 

entered into with a processor to process 

donated foods. Currently, most donated 

foods are processed in accordance with 

State Processing Agreements. However, 

some large school food authorities 

currently have agreements with 

processors to process donated foods and 

purchase the finished end products, as 

permitted by distributing agencies. 

Additionally, as previously described, 

FNS has permitted multi-State 

processors to process donated foods in 

accordance with National Processing 

Agreements under a demonstration 

project initiated in 2004. 


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In the new § 250.30(b), we propose to 

clarify that processing of donated foods 

must be performed in accordance with 

an agreement between the processor and 

FNS, between the processor and the 

distributing agency, or, if permitted by 

the distributing agency, between the 

processor and a recipient agency (or 

subdistributing agency). We propose to 

include in new § 250.30(b) the 

stipulation in current § 250.30(c)(4)(ix) 

that an agreement may not obligate the 

distributing or recipient agency, or the 

Department, to provide donated foods to 

a processor for processing. USDA 

purchase and donation of foods is 

dependent on market conditions, and 

specific foods may not be available for 

donation in certain years. Additionally, 

we propose to retain in this new 

§ 250.30(b) the requirement in current 

§ 250.30(p) that, for processing of 

donated foods in child nutrition 

programs, the distributing agency must 

provide the State administering agency 

(if a different agency) with an 

opportunity to review its processing 

agreements to ensure compliance with 

nutritional and labeling requirements. 

We propose to remove the stipulation in 

current § 250.30(c)(1) that a processing 

agreement must be in standard written 

form. 

In accordance with the National 

Processing Agreements permitted under 

the demonstration project, FNS reviews 

and approves end product data 

schedules submitted by multi-State 

processors, and holds and manages the 

processor’s performance bond or letter 

of credit to protect the value of donated 

food inventories. FNS also monitors the 

processor’s national donated food 

inventory through the review of 

performance reports, which processors 

must submit to FNS on a monthly basis. 

As previously mentioned, FNS’

performance of these activities has 

significantly reduced the labor and 

paperwork burden for both processors 

and distributing agencies. Hence, in the 

new § 250.30(c), we propose to require 

that a multi-State processor enter into a 

National Processing Agreement with 

FNS to process donated foods into end 

products, in accordance with end 

product data schedules approved by 

FNS. We would also indicate that, as 

proposed in the new § 250.32, FNS 

holds and manages the processor’s 

performance bond or letter of credit to 

protect the value of donated food 

inventories under the National 

Processing Agreement. We would 

indicate that FNS does not itself procure 

or purchase end products under such 

agreements, and that a multi-State 

processor must enter into a State 

Participation Agreement with the 

distributing agency in order to sell 

nationally approved end products in the 

State, as proposed in the new 

§ 250.30(d). However, a distributing 

agency may still choose to provide 

donated foods to a multi-State processor 

for processing in accordance with its 

State Processing Agreement, as 

described below, irrespective of that 

processor’s National Processing 

Agreement. 

In the new § 250.30(d), we propose to 

require the distributing agency to enter 

into a State Participation Agreement 

with a multi-State processor to permit 

the sale of end products produced under 

the processor’s National Processing 

Agreement in the State, as previously 

indicated. The State Participation 

Agreement is currently utilized in 

conjunction with National Processing 

Agreements in the demonstration 

project. Under the State Participation 

Agreement, we propose to permit the 

distributing agency to select the 

processor’s nationally approved end 

products for sale to eligible recipient 

agencies within the State, or to directly 

purchase such end products. The 

processor may provide a list of such 

nationally approved end products in a 

summary end product data schedule. 

We also propose to permit the 

distributing agency to include other 

processing requirements in the State 

Participation Agreement, such as the 

specific methods of end product sales 

permitted in the State, in accordance 

with the new § 250.36, (e.g., a refund, 

discount, or indirect discount method of 

sales), or the use of labels attesting to 

fulfillment of meal pattern requirements 

in child nutrition programs. 

Currently, a distributing agency must 

enter into a State Processing Agreement 

with a processor to process donated 

foods into finished end products for sale 

in the State. Under such an agreement, 

the distributing agency may purchase 

the finished end products for 

distribution to eligible recipient 

agencies. However, it may also select a 

number of processors with which it 

enters into such agreements, and permit 

recipient agencies to purchase finished 

end products from them, in accordance 

with applicable procurement 

requirements. These latter types of State 

Processing Agreements are commonly 

called ‘‘master agreements’’. The 

distributing agency must utilize 

selection criteria in current 

§ 250.30(c)(1) to select processors with 

which to enter into master agreements. 

Under all State Processing Agreements, 

the distributing agency must approve 

end product data schedules submitted 

by the processor, hold and manage the 

processor’s performance bond or letter 

of credit, and assure compliance with 

all processing requirements. 

In the new § 250.30(e), we propose to 

clarify the distinction between master 

agreements and other State Processing 

Agreements, and to include in this new 

section the required criteria in current 

§ 250.30(c)(1) for selecting processors 

under master agreements. However, we 

propose to remove the statement that 

selection criteria will be reviewed by 

the FNS Regional Office during its 

management evaluation of the 

distributing agency. We propose to 

require that the distributing agency 

enter into a State Processing Agreement 

with an in-State processor to process 

donated foods, as currently required. 

We would also indicate that the 

distributing agency may choose to 

provide donated foods for processing 

under such an agreement with a multiState processor as well, rather than 

utilize the State Participation 

Agreement, as described above. 

In current § 250.30(b)(3), the 

distributing agency may permit 

recipient agencies (or subdistributing 

agencies) to enter into agreements with 

processors to process donated foods and 

to purchase the finished end products. 

We propose to permit such agreements 

in the new § 250.30(f), and to refer to 

them as Recipient Processing 

Agreements. We also propose to clarify 

that, under such agreements, the 

distributing agency may also permit the 

recipient agency to approve end product 

data schedules or select nationally 

approved end product data schedules, 

review processor performance reports, 

and monitor other processing activities. 

All such activities must be performed in 

accordance with the requirements of 

this part. We propose to clarify that a 

recipient agency may also enter into a 

Recipient Processing Agreement, and 

perform the activities described above, 

on behalf of other recipient agencies, in 

accordance with an agreement between 

the parties (such as in a school 

cooperative, or co-op). We propose to 

include the requirement in current 

§ 250.30(l) that the distributing agency 

approve all Recipient Processing 

Agreements. 

In current § 250.30(b)(1), the 

distributing agency must test end 

products with recipient agencies prior 

to entering into processing agreements, 

to ensure that they will be acceptable to 

recipient agencies. Such testing is not 

required if end products have 

previously been tested, or have 

otherwise been determined to be 

acceptable to recipient agencies. We 

propose to include these requirements 

in the new § 250.30(g), but to clarify that 


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the distributing agency may permit 

recipient agencies to test end products. 

We also propose to amend the current 

requirement that the distributing agency 

develop a system to monitor product 

acceptability on a periodic basis by 

requiring instead that the distributing 

agency, or its recipient agencies, must 

monitor product acceptability on an 

ongoing basis. 

In current § 250.30(c)(4)(xvi), a 

processor may not assign the processing 

agreement, or subcontract with another 

entity, to perform any aspect of 

processing without the written consent 

of the distributing agency and the 

contracting agency. We propose to 

clarify, in the new § 250.30(h), that a 

processor may not assign any processing 

activities under its processing 

agreement, or subcontract with another 

entity to perform any aspect of 

processing, without the written consent 

of the other party to the agreement, 

which may be the distributing, 

subdistributing, or recipient agency, or 

FNS. We propose to permit the 

distributing agency to provide the 

required consent as part of its State 

Participation Agreement with the 

processor. 

In current § 250.30(c)(1), processing 

agreements are limited to one year, but 

may provide for an option to extend the 

agreement for two additional one-year 

periods. In the new § 250.30(i), we 

propose to revise this requirement by 

permitting all agreements between a 

distributing, subdistributing, or 

recipient agency and a processor to be 

up to five years in duration. This 

proposal would permit the appropriate 

agency to determine the length of 

agreement that would be to its best 

advantage, within the five-year 

limitation, and would reduce the time 

and labor burden imposed on such 

agencies. We propose to make National 

Processing Agreements permanent. We 

propose to indicate that amendments to 

any agreements may be made as needed, 

with the concurrence of the parties to 

the agreement, and that such 

amendments will be effective for the 

duration of the agreement, unless 

otherwise indicated. 

We propose to remove the following 

requirements or statements in current 

§ 250.30 relating to processing 

agreements, as they are overly 

restrictive, or simply unnecessary: 

• The requirement in current 

§ 250.30(c)(1) that the FNS Regional 

Office review processing agreements. 

• The requirement in current 

§ 250.30(c)(2) that the agreement be 

prepared and reviewed by State legal 

staff to ensure conformance with 

Federal regulations. 

• The statement in current 

§ 250.30(c)(3) indicating which official 

in the processing enterprise must sign 

the agreement. 

• The requirement in current 

§ 250.30(l) that the distributing agency 

provide a copy of the 7 CFR Part 250 

regulations to processors, and a copy of 

agreements to the FNS Regional Office. 

• The requirement in current 

§ 250.30(q) with respect to FNS reviews 

of processing agreements or reports, and 

FNS actions following from such 

reviews. 

• The stipulation in current 

§ 250.30(r) that FNS will provide copies 

of agreements to persons requesting 

them. 

2. Procurement Requirements, § 250.31 

The requirements for the procurement 

of goods and services under Federal 

grants are described in 7 CFR Parts 3016 

and 3019. 7 CFR Part 3016 contains the 

Department’s regulations establishing 

uniform administrative requirements for 

Federal grants and cooperative 

agreements and subawards to State, 

local, and Indian tribal governments; 7 

CFR Part 3019 contains the 

Department’s regulations establishing 

uniform administrative requirements for 

Federal grants and cooperative 

agreements awarded to institutions of 

higher education, hospitals, and other 

nonprofit organizations. In the new 

§ 250.31(a), we propose to indicate the 

applicability of these requirements to 

the procurement of processed end 

products or of other processing services 

relating to donated foods, and to 

indicate that distributing or recipient 

agencies may use procurement 

procedures that conform to applicable 

State or local laws, as appropriate, but 

must ensure compliance with the 

Federal procurement requirements. We 

propose to remove the reference in 

current § 250.30(c)(1) to procurement 

standards in Attachment O of OMB 

Circular A–102, as this circular is 

obsolete. 

In accordance with 7 CFR 3016.36 

and 3019.44, procurement of goods and 

services may be performed using small 

purchase procedures if the cost of such 

procurement does not exceed the 

simplified acquisition threshold, as 

defined in 41 U.S.C. 403(11), which is 

currently $100,000. Under these 

procedures, price quotations must be 

obtained from several sources. However, 

if the cost of such procurement exceeds 

this threshold, sealed bids or 

competitive proposals must be used. In 

the new § 250.31(b), we propose to 

indicate the method of procurement 

required in accordance with 7 CFR 

3016.36 and 3019.44, and the simplified 

acquisition threshold. We indicate that 

these methods of procurement are more 

fully described in 7 CFR 3016.36 and 

3019.44. We also propose to clarify that, 

if the threshold for determining the 

required method of procurement is 

lower under State or local laws, as 

applicable, then the distributing or 

recipient agency is obligated to comply 

with those procedures. 

In the new § 250.31(c), we propose to 

require specific information in 

procurement documents, to assist 

recipient agencies in ensuring that they 

receive credit for the value of donated 

foods in finished end products. We 

propose to require that procurement 

documents include the price to be 

charged for the finished end product or 

other processing service, the method of 

end product sales that will be utilized, 

the processing agreement value of the 

donated food in the finished end 

products, and the location for the 

delivery of the finished end products. 

We propose to remove current 

requirements for the provision of 

pricing information outside of the 

procurement process, including: 

(1) The requirement in current 

§ 250.30(c)(4)(ii) that pricing 

information be included with the end 

product data schedule; and 

(2) The requirements in current 

§ 250.30(d)(3) and (e)(2) that the 

processor provide pricing information 

summaries to the distributing agency, 

and the distributing agency provide 

such information to recipient agencies, 

as soon as possible after completion of 

the agreement. 

3. Protection of Donated Food Value, 

§ 250.32 

In current § 250.30(c)(4)(viii)(B), the 

processor is required to obtain, and 

furnish to the distributing agency, 

financial protection to protect the value 

of donated foods prior to their delivery 

for processing, by means of a 

performance bond, an irrevocable letter 

of credit, or an escrow account. The 

distributing agency must determine the 

dollar value of the financial protection, 

based on the quantity of donated foods 

for which the processor is accountable. 

In the new § 250.32(a), we propose to 

include the current requirement that the 

processor obtain such financial 

protection, but to remove the option to 

obtain an escrow account, as it is littleused. However, we propose to require 

that a multi-State processor provide the 

performance bond or irrevocable letter 

of credit to FNS, in accordance with its 

National Processing Agreement. We 

propose to clarify that the amount of the 

performance bond or letter of credit 

must be sufficient to cover the 


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maximum value of raw or processed 

donated foods that the processor is 

expected to maintain in inventory at any 

give time, which is determined by the 

distributing agency or by FNS, as 

appropriate. 

In the new § 250.32(b), we propose to 

indicate the conditions under which the 

distributing agency must call in the 

performance bond or letter of credit. We 

also propose to indicate that FNS will 

call in the performance bond or letter of 

credit under the same conditions, and 

will ensure that any monies recovered 

are reimbursed to distributing agencies 

for losses of entitlement foods. 

4. Processing Yields of Donated Foods, 

§ 250.33 

In current § 250.30(c)(4), the processor 

must submit, as part of the agreement 

approval, information regarding the 

production of an end product to ensure 

that the distributing or recipient agency, 

as appropriate, receives the benefit of 

the donated food processed. This 

information, which is submitted in a 

format called the end product data 

schedule, must include the following: 

• A description of the end product. 

• The types and quantities of donated 

foods and other ingredients needed to 

produce a specific quantity of end 

product. 

• The yield factor for the donated 

food. 

• The contract value of the donated 

food. 

• Any pricing information in addition 

to the charge for the end product or feefor-service. 

In the new § 250.33, we propose to 

retain the required submission of the 

end product data schedule, and to more 

specifically describe the required 

processing yields of donated food, 

which is currently referred to as the 

yield factor. In the new § 250.33(a), we 

propose to require submission of the 

currently required information on the 

end product data schedule, with the 

exception of the price charged for the 

end product or other pricing 

information, and the contract value of 

the donated food. As described above, 

pricing information must be included in 

the procurement of end products or 

other processing services relating to 

donated foods. Inclusion of such 

information on end product data 

schedules may be misleading, as it may 

lead some recipient agencies to 

conclude that procurement has been 

performed by the distributing agency 

under its State Processing Agreement or 

State Participation Agreement. Prices 

currently included on end product data 

schedules generally reflect the highest 

price that a processor will charge for the 

finished end product. 

We also propose to require inclusion 

of the processing yield of donated food, 

which may be expressed as the quantity 

of donated food (e.g., lbs. or cases) 

needed to produce a specific quantity of 

end product, or as the percentage of 

donated food returned in the finished 

end product. We propose to retain the 

requirement that end product data 

schedules be approved by the 

distributing agency under State 

Processing Agreements. We propose to 

clarify that, for donated foods processed 

under guaranteed return or standard 

yield, the end product data schedules 

must also be approved by the 

Department. We propose to require that, 

under National Processing Agreements, 

end product data schedules be approved 

by the Department. Lastly, we propose 

to clarify that an end product data 

schedule must be submitted, and 

approved, for each new end product 

that a processor wishes to provide, or 

for a previously approved end product 

in which the ingredients or other 

pertinent information have been altered. 

In new § 250.33(b) through (e), we 

propose to describe the several different 

processing yields of donated foods that 

may be approved in end product data 

schedules. In current § 250.30(c)(4)(ii), 

the processor must meet a 100 percent 

yield in the processing of all 

substitutable donated foods (i.e., all 

donated foods except beef, pork, and 

poultry). Under 100 percent yield, the 

processor must ensure that 100 percent 

of the raw donated food is returned in 

the finished end product. Production 

loss of donated food must be accounted 

for by replacement with commercially 

purchased food of the same generic 

identity, of U.S. origin, and of equal or 

better quality than the donated food. To 

demonstrate this, the processor must 

report reductions in donated food 

inventories on performance reports in 

the amount of donated food contained 

in the finished end product rather than 

the amount that went into production. 

We propose to include the current 100 

percent yield requirement in the new 

§ 250.33(b), and to clarify that this 

processing yield is required for all 

donated foods except beef, pork, and 

poultry. We propose to indicate that 

FNS may make exceptions to the 100 

percent yield requirement, on a case-bycase basis, if a processor experiences a 

significant manufacturing loss. 

Processing of donated foods such as 

beef, pork, and poultry, invariably 

results in significant loss of product, 

such as the bones in chicken. Hence, the 

processing yield must take such losses 

into account, in the same manner that 

the processing of commercial product 

accounts for such losses. Currently, the 

three processing yields approved in end 

product data schedules to account for 

such losses include guaranteed yield, 

guaranteed minimum yield, and 

standard yield. We propose to describe 

these processing yields in the following 

sections. 

Under guaranteed yield or return, the 

processor must ensure that a specific 

quantity of end product will be 

produced from the specific quantity of 

donated food put into production, as 

determined by the parties to the 

processing agreement, and, for State 

Processing Agreements, approved by the 

Department. The guaranteed yield must 

be indicated on the end product data 

schedule. We propose to describe 

guaranteed yield in the new § 250.33(c). 

Under guaranteed minimum yield or 

return, the processor must ensure that a 

specific minimum quantity of end 

product will be produced from the 

specific quantity of donated food in a 

production run. If a larger quantity of 

end product than the guaranteed 

minimum is produced, the processor 

must provide the full quantity to the 

appropriate agency, which must pay the 

processor for the additional end 

products produced. We propose to 

describe guaranteed minimum yield in 

the new § 250.33(d). 

Under standard yield, the processor 

must ensure that a specific quantity of 

end product, as determined by the 

Department, will be produced from a 

specific quantity of donated food. The 

established standard yield is higher than 

the average yield under normal 

commercial production, and serves to 

reward those processors that can 

process donated foods most efficiently. 

Like guaranteed yield, standard yield 

ensures that the recipient agency will 

receive a specific quantity of end 

product, which helps to ensure that it 

can meet its food service needs. It also 

avoids the paperwork and review 

needed to ensure that guaranteed 

minimum yield is met. We propose to 

describe standard yield in the new 

§ 250.33(e). 

In the new § 250.33(f), we propose to 

require that the processor compensate 

the distributing or recipient agency, as 

appropriate, for the loss of donated 

foods, or for commercially purchased 

foods substituted for donated foods. 

Loss of donated foods may result for a 

number of reasons, including the 

processor’s failure to meet the required 

processing yield, as described above, or 

from spoilage or damage of donated 

foods in storage, or improper 

distribution of end products. In order to 

compensate for such losses of donated 


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foods, we propose to require that the 

processor: 

(1) Replace the lost donated food or 

commercial substitute with 

commercially purchased food of the 

same generic identity, of U.S. origin, 

and of equal or better quality than the 

donated food; or 

(2) Pay the distributing or recipient 

agency, as appropriate, for the 

replacement value of the donated food 

or commercial substitute. 

Processing of donated foods may 

sometimes result in finished end 

products that are wholesome, but do not 

meet the specifications required for use 

in the recipient agency’s food service. 

As this is considered production loss, 

the processor must provide 

compensation for the donated foods 

processed into such end products. In 

normal business practice, such products 

are usually returned to production for 

processing into end products that meet 

required specifications. These are often 

called rework products. In the new 

§ 250.33(g), we propose to require that 

the processor compensate the 

distributing or recipient agency, as 

appropriate, for such donated foods, or 

for commercially purchased foods 

substituted for donated foods, by 

returning the end products to 

production for processing into end 

products that meet the required 

specifications. However, we also 

propose to permit the processor to make 

such compensation by paying the 

distributing or recipient agency, as 

appropriate, for the replacement value 

of the donated food or commercial 

substitute in the end products, and 

retaining such end products for its own 

use. This option would not, however, be 

permitted under guaranteed return or 

standard yield. 

In current § 250.30(c)(4)(viii)(D), the 

processor must credit the distributing or 

recipient agency, as appropriate, for the 

sale of any by-products resulting from 

the processing of donated foods, or of 

commercially purchased foods 

substituted for donated foods. Crediting 

must be achieved through reduction of 

the processing fee, and must be in the 

amount received from such sale, or the 

market value of the by-products. 

However, such crediting is not required 

under guaranteed return or standard 

yield. We propose to include this 

requirement in the new § 250.33(h), but 

propose to require crediting through 

invoice reductions, or another means of 

crediting. We also propose to clarify that 

the processor must credit the 

appropriate agency for the net value 

received from the sale of by-products, 

after subtraction of any documented 

expenses incurred in preparing the byproduct for sale. We propose to remove 

the requirement in current 

§ 250.30(c)(4)(viii)(D) that the processor 

credit the distributing or recipient 

agency for the sale of donated food 

containers. 

In current § 250.30(i), the processor 

must meet applicable Federal labeling 

requirements, and must follow the 

procedures required for approval of 

labels for end products that claim to 

meet meal pattern requirements in child 

nutrition programs. We propose to 

include these requirements in the new 

§ 250.33(i). 

5. Substitution of Donated Foods, 

§ 250.34 

We propose to include requirements 

for the substitution of donated foods in 

the new § 250.34. Currently, in 

§ 250.30(f)(1), the processing agreement 

may allow the processor to substitute 

commercially purchased foods for all 

donated foods except donated beef, 

pork, and poultry without prior 

approval of the Department. 

Substitution must be with commercially 

purchased foods of the same generic 

identity, of U.S. origin, and of equal or 

better quality than the donated foods. 

Substitution of donated poultry is 

permitted with some limitations in 

accordance with a processor’s approved 

plan. Substitution of donated beef and 

pork is not permitted under the 

regulations. 

As previously mentioned in the 

preamble, the Department has waived 

current regulations, since 2001, to 

conduct a demonstration project that 

has permitted selected processors to 

substitute commercially purchased beef 

and pork for donated beef and pork, in 

accordance with an approved plan. 

Substitution must be with commercial 

beef and pork of U.S. origin, and of 

equal or better quality than the donated 

food. Under the demonstration project, 

only bulk beef and pork delivered to the 

processor from a USDA vendor may be 

substituted. Donated beef and pork 

delivered to a processor from a recipient 

agency facility for processing may not 

be substituted (this process is 

commonly called backhauling). In a 

similar manner, substitution of 

backhauled donated poultry is 

prohibited in current § 250.30(f)(1)(ii). 

In its plan, the processor must describe 

the production and recordkeeping 

procedures that will be utilized to 

ensure that substitution requirements 

will be met. 

In the new § 250.34(a), we propose to 

permit a processor to substitute any 

donated food that is delivered to it from 

a USDA vendor with commercially 

purchased food of the same generic 

identity, of U.S. origin, and of equal or 

better quality than the donated food. 

Prior approval, or an approved 

substitution plan, would not be 

required. Hence, we propose to remove 

the required elements of a processor’s 

plan for poultry substitution in current 

§ 250.30(f)(1)(ii)(B). 

In current § 250.30(f)(1)(ii)(A), 

substitution of commercial poultry for 

donated poultry may be made before the 

processor actually receives a shipment 

of the donated poultry. In such case, 

however, the processor assumes all 

risks—i.e., the Department will not be 

liable if, due to changing market 

conditions or other reasons, it is unable 

to purchase and deliver donated poultry 

to the processor for processing. In the 

new § 250.34(a), we propose to allow a 

processor the option to substitute any 

donated food in advance of the receipt 

of the donated food shipment, and to 

more clearly describe the processor’s 

assumption of risk should the 

Department be unable to purchase and 

deliver any donated food so substituted. 

Lastly, we propose to require that 

commercially purchased food 

substituted for donated food meet the 

same processing yield requirements that 

would be required for the donated food, 

as proposed in the new § 250.33. 

Donated food may be backhauled to a 

processor from a recipient agency 

facility when a recipient agency 

determines that, despite earlier 

projections, it is unable to utilize the 

donated food in its current form. Rather 

than see it go to waste, the recipient 

agency provides the food to a processor 

to process into a more usable form. 

However, because the food has been 

sitting in storage for some time, it may 

be approaching the end of its shelf life. 

Hence, in the interest of food safety, it 

is important to assure that the food is 

processed and used as soon as possible. 

In the new § 250.34(b), we propose to 

prohibit substitution or commingling of 

all backhauled donated foods, and to 

require that the processor process them 

into end products for sale and delivery 

to the recipient agency that provided 

them, and not to any other recipient 

agency. Additionally, we propose to 

prohibit the processor from providing 

payment for them in lieu of processing. 

In current § 250.30(g), the processing 

of donated beef, pork, and poultry must 

occur under Federal acceptance service 

grading, in order to assure that 

substitution requirements are met. Such 

grading is conducted by the Agricultural 

Marketing Service (AMS). The grader 

verifies the quality and quantity of food 

that is put into production, and the 

quantity of end products produced, and 

includes the pertinent information on a 


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grading certificate. Federal acceptance 

service grading is not required for 

substitution of other donated foods, 

unless specifically requested by the 

Department, or by the distributing 

agency. In accordance with current 

§ 250.30(h), if the distributing agency 

determines that acceptance service 

grading is to be performed, it must 

consult with the applicable Federal 

agency in establishing specific grading 

requirements. In all cases, the processor 

is responsible for paying the cost of the 

acceptance service grading. In current 

§ 250.30(f)(1), the processor must 

maintain records (including grading 

certificates) necessary to document that 

substitution of all donated foods has 

been conducted in accordance with the 

requirements in 7 CFR Part 250. We 

propose to include all of these 

requirements in the new § 250.34(c). 

In current § 250.30(g), the distributing 

agency may approve a waiver of the 

grading requirement for donated beef, 

pork, or poultry under certain 

conditions. We propose to include this 

contingency, and retain the current 

conditions under which the distributing 

agency may approve such a waiver, in 

the new § 250.34(d). However, we 

propose to indicate that such waivers 

may only be approved on a case by case 

basis—i.e., for a specific production run. 

The distributing agency may not 

approve a blanket waiver of the 

requirement. We also include the 

current stipulation that a waiver may 

only be approved if the processor’s past 

performance indicates that the quality of 

the end product will not be adversely 

affected. 

Also, in current § 250.30(f)(1)(ii)(A), 

the processor may use donated poultry 

that has been substituted with 

commercially purchased poultry in any 

processing activities conducted at its 

facilities. However, the processor may 

not sell the donated poultry as an intact 

unit. Additionally, in current 

§ 250.30(f)(2), substituted donated food 

must be used by the processor and may 

not be sold or disposed of in bulk form. 

In the new § 250.34(e), we propose to 

include the current provision that the 

processor may use any substituted 

donated food in other processing 

activities conducted at its facilities. We 

also propose to permit the processor to 

sell any substituted donated food as an 

intact unit as long as the processor 

removes all USDA labels, as applicable. 

We propose to remove the stipulation, 

in current § 250.30(f)(4), that title to the 

substituted donated food passes to the 

processor upon the initiation of 

processing of the end product with the 

commercial substitute. The transfer of 

title to donated foods, which are part of 

the Federal grant, is limited to the 

distributing agency or recipient agency, 

as the recipients of the grant. 

Subsequent donated food activities may 

be performed, in accordance with 

Federal regulations and the terms of 

processing agreements, but would not 

include a further transfer of title. 

We propose to remove the 

requirements in current § 250.30(f) that 

the processor maintain documentation 

that it has not reduced its level of 

commercial production in exercising the 

option to substitute commercially 

purchased foods for donated foods, or 

that it has made sufficient purchases to 

meet the 100 percent yield requirement 

in processing of donated foods. In 

addition to being virtually impossible to 

determine, it is unlikely that a processor 

would choose to process donated foods 

if it were to adversely affect its 

commercial activities. The requirement 

that the processor compensate the 

distributing or recipient agency for 

failure to meet required processing 

yields of donated foods, as proposed in 

the new § 250.33, is more appropriate, 

and effective, than a requirement that 

the processor make specific purchases 

of foods on the commercial market. 

We propose to remove the 

requirements in current § 250.30(f)(2) 

and (f)(3) relating to the substitution of 

concentrated skim milk for donated 

nonfat dry milk, in accordance with the 

proposed removal of this substitution 

option under the revised definition of 

substitution in § 250.3. 

6. Storage, Inspection, Quality Control, 

and Inventory Management, § 250.35 

We propose to include requirements 

for the storage, inspection, quality 

control, and inventory management of 

donated foods provided for processing 

in the new § 250.35. In current 

§ 250.30(c)(4)(x), the processor must 

describe its quality control system, and 

assure that an effective quality control 

system will be maintained for the 

duration of its agreement. In the new 

§ 250.35(a), we propose to require the 

processor to ensure the safe and 

effective storage of donated foods, 

including compliance with the general 

storage requirements in current 

§ 250.14(b), and to maintain an effective 

quality control system at its processing 

facilities. We propose to require the 

processor to maintain documentation to 

verify the effectiveness of its quality 

control system, and to provide such 

documentation upon request. 

In current § 250.30(g), the processing 

of donated beef, pork, and poultry, and 

of commercial meat products that 

contain any donated foods, must be 

performed in plants under continuous 

Federal meat or poultry inspection. 

However, in States certified as having 

programs at least equal to Federal 

standards, processing of such foods may 

be performed in plants under 

continuous State meat or poultry 

inspection for processed end products 

that are utilized in the State, rather than 

the Federal inspection. The inspection 

requirements assure that processing of 

donated foods is performed in a safe and 

sanitary environment, and that labeling 

requirements are met. We propose to 

include these inspection requirements 

without change in the new § 250.35(b). 

In the new § 250.35(c), we propose to 

clarify that a processor may commingle 

donated foods and commercially 

purchased foods, unless the processing 

agreement specifically requires that 

donated foods and commercially 

purchased foods be stored separately, or 

the donated foods have been backhauled 

from a recipient agency. However, we 

propose to clarify that such 

commingling must be performed in a 

manner that ensures the safe and 

efficient use of donated foods, as well as 

compliance with substitution 

requirements, and with reporting of 

donated food inventories on 

performance reports, as required in 7 

CFR Part 250. We also propose to 

require processors to ensure that 

commingling of finished end products 

with other food products by distributors 

ensures the sale to recipient agencies of 

end products that meet substitution 

requirements. This incorporates the 

provision in current § 250.30(f)(1)(ii)(B) 

that finished poultry end products that 

have not been produced under AMS 

acceptance service grading may not be 

substituted for end products containing 

donated foods. However, we propose to 

remove the requirement in current 

§ 250.30(i) that exterior shipping 

containers or product labels for end 

products containing nonsubstitutable 

donated foods (i.e., beef, pork, and 

poultry) include such information to 

ensure their sale to eligible recipient 

agencies. Such assurance may be made 

through notification of the appropriate 

parties or by other means. 

In current § 250.30(n)(1), a processor 

is limited in the amount of donated 

foods for which it is accountable at any 

one time. A processor may not have on 

hand more than a six-month supply of 

donated foods, based on an average 

amount utilized for that period. 

However, the distributing agency may 

allow the processor, through written 

approval, to maintain a larger amount of 

donated foods in inventory if it 

determines that the processor may 

efficiently store and process such an 

amount. The distributing agency may 


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not order donated foods for delivery to 

a processor if it would result in 

excessive inventories, unless it has 

granted such approval. We propose to 

include the current limitation on 

processors’ inventories of donated 

foods, and the distributing agency’s 

authority to approve a larger inventory, 

in the new § 250.35(d). 

In current § 250.30(n)(3), a processor 

must pay the distributing agency for the 

value of donated foods held in excess of 

allowed inventory levels at the end of 

the year, as indicated on the June 

performance report. However, in 

practice, the distributing agency often 

allows a processor to carry over such 

donated foods into the next year of the 

agreement, in accordance with its 

authority to approve donated food 

inventories in excess of the six-month 

limitation. The distributing agency may 

also direct the processor, in accordance 

with current § 250.13, to transfer or 

redonate donated foods held in excess 

of allowed levels to another distributing 

or recipient agency, or processor, if the 

processor is unable to process such 

foods. In the new § 250.35(e), we 

propose to clarify that the distributing 

agency may permit the processor to 

carry over donated foods in excess of 

allowed levels into the next year of its 

agreement, if it determines that the 

processor may efficiently process such 

foods. We also propose to include the 

distributing agency’s current option to 

direct the processor to transfer or 

redonate such donated foods to another 

distributing or recipient agency or 

processor. Lastly, we propose to clarify 

that, if these options are not practical, 

the distributing agency must require the 

processor to pay it for the donated foods 

held in excess of allowed levels, at the 

replacement value of the donated foods. 

In current § 250.30(j), when an 

agreement terminates, and is not 

extended or renewed, the distributing 

agency must direct the processor to 

return donated foods remaining in 

inventory, or pay the distributing or 

recipient agency for the donated foods 

at the replacement value. For 

substitutable donated foods, the 

distributing agency may also permit the 

processor to return commercially 

purchased foods that meet substitution 

requirements in place of the donated 

foods, or transfer the donated foods to 

other agencies with which it has entered 

into agreements. In the new § 250.35(f), 

we propose to expand the current 

options for the disposition of 

substitutable donated foods at the 

termination of an agreement to all 

donated foods, in accordance with our 

proposal, in the new § 250.34, to permit 

substitution of all donated foods. We 

propose to clarify that the disposition of 

donated foods may include a 

redonation, as well as a transfer; i.e., the 

distributing agency may permit a 

redonation of donated foods to another 

State distributing agency, with FNS 

approval, in accordance with current 

§ 250.13(h). We also propose to permit 

the transfer or redonation of 

commercially purchased foods that meet 

the substitution requirements in the 

new § 250.34 in place of the donated 

foods. If the distributing agency requires 

the processor to pay for donated foods, 

we propose to require such payment at 

the processing agreement value or 

replacement value, whichever is higher, 

rather than the several options for 

assigning the donated food value 

currently included in the regulations. 

We propose to include the current 

requirement that the processor pay the 

cost of transporting any donated foods 

when the agreement is terminated at the 

processor’s request, or as a result of the 

processor’s failure to comply with the 

requirements of 7 CFR Part 250. 

We propose to remove the stipulation 

in current § 250.30(j)(3) that funds 

received by distributing agencies from 

payments for donated foods upon 

termination of an agreement be used in 

accordance with FNS Instruction 410–1. 

The allowable use of funds accruing 

from program operations is described in 

current § 250.15(f). 

7. End Product Sales and Crediting for 

the Value of Donated Foods, § 250.36 

In current § 250.30(d)(1), a processor 

must sell end products to recipient 

agencies under a system that assures 

such agencies receive credit or ‘‘value 

pass-through’’ for the contract value of 

donated food contained in the end 

product. And, in current § 250.30(e), a 

processor must ensure that, when end 

products are provided to commercial 

distributors for sale and delivery to 

recipient agencies, such sales occur 

under a system that provides such 

agencies with a credit for the contract 

value of donated food contained in the 

end product. In the new § 250.36(a), we 

propose to require that the sales of end 

products, either directly by the 

processor or through a commercial 

distributor, be performed utilizing one 

of the methods of end product sales 

contained in this section, to ensure that 

the distributing or recipient agency, as 

appropriate, receives credit for the value 

of donated foods contained in end 

products. We also propose to require 

that all systems of sales utilized must 

provide clear documentation of 

crediting for the value of the donated 

foods contained in the end products. 

In current § 250.30(d)(1)(i), a 

processor may utilize a refund or rebate 

system, in which the processor sells end 

products to the distributing or recipient 

agency, as appropriate, at the 

commercial, or gross, price, and 

provides the appropriate agency with a 

refund for the contract value of donated 

foods contained in the end products. In 

current § 250.30(e), a distributor may 

also sell end products received from the 

processor under a refund system, with 

the processor responsible for providing 

the refund to the appropriate agency. 

We propose to permit end product sales 

under this system, by either the 

processor or distributor, in the new 

§ 250.36(b). We propose to require the 

processor to remit the refund to the 

distributing or recipient agency, as 

appropriate, within 30 days of receiving 

a request for a refund from the 

appropriate agency. We propose to 

clarify that the refund request must be 

in writing but may be made by e-mail 

or other electronic means. We propose 

to remove the requirement in current 

§ 250.30(k) that the recipient agency 

submit a refund application to receive a 

refund for the value of donated foods in 

end products, as the term ‘‘refund 

application’’ implies the submittal of a 

written form, which is not necessary. 

Additionally, we propose to remove the 

30-day, or quarterly, period by which 

the distributing or recipient agency 

must currently submit such a request. 

Once end product sales are made, we 

would expect requests for refunds to be 

made in an expeditious manner, in the 

interest of the program. However, it 

should be up to the appropriate agency 

to determine how frequently it wishes to 

receive its refunds. To that end, we also 

propose to remove the option, in current 

§ 250.30(k)(3), for the processor to 

submit refunds that total $25 or less on 

a quarterly basis. Lastly, we propose to 

remove the requirement in current 

§ 250.30(k)(3) that the processor submit 

copies of refund payments to the 

distributing agency; however, the 

distributing agency may choose to 

require the submission of such 

documentation to support information 

included in the processor’s performance 

reports. 

In current § 250.30(d)(1)(ii), the 

processor may utilize a discount system, 

in which the processor sells end 

products at a net price that provides a 

discount from the commercial case price 

for the value of the donated foods 

contained in the end products. We 

propose to permit end product sales 

under this system in the new 

§ 250.36(c). We propose to refer to this 

system as a direct discount system to 


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distinguish it from the method of end 

product sales described in the following 

paragraph. 

In current § 250.30(e)(1)(ii), a 

distributor may sell end products to the 

distributing or recipient agency, as 

appropriate, at a net price that provides 

a discount from the commercial case 

price for the value of the donated foods 

contained in the end products. The 

processor then compensates the 

distributor for the value of the discount 

provided to the distributing or recipient 

agency. Since the distributor has 

purchased the end products from the 

processor at the commercial price, this 

system is referred to as the ‘‘hybrid’’

system—i.e., it includes a sale of the end 

product at both the commercial and 

discounted price. We propose to permit 

end product sales under this system in 

the new § 250.36(d), and to refer to it as 

the indirect discount system. We 

propose to require the processor to 

ensure that the distributor notify it of 

such sales, on a monthly basis, through 

automated sales reports or other 

electronic or written submission. We 

propose to remove the requirement, in 

current § 250.30(k)(2), that the 

distributor apply to the processor for a 

refund under this system. 

In current § 250.30(d)(2), and in 

accordance with the definition in 

current § 250.3, the processor may sell 

end products to the distributing or 

recipient agency at a ‘‘fee-for-service’’. 

The fee-for-service includes all costs to 

produce the end product minus the 

value of the donated food put into 

production. The processor must identify 

any charge for delivery of end products 

separately from the fee-for-service on its 

invoice. We propose to permit this 

method of end product sales in the new 

§ 250.36(e). In current § 250.30(e)(1)(iv), 

the processor may provide end products 

sold under a fee-for-service system to a 

distributor for delivery to the 

distributing or recipient agency. In such 

cases, the processor must identify the 

distributor’s delivery charge separately 

from the fee-for-service on its invoice, or 

may permit the distributor to bill the 

distributing or recipient agency 

separately for the delivery of end 

products. As a matter of policy, we have 

also permitted the processor to provide 

written approval to the distributor to 

bill the distributing or recipient agency 

for the total case price-i.e., for the feefor-service and the delivery charge. In 

such cases, the processor must ensure 

that the distributor identifies the fee-forservice and delivery charge separately 

on the invoice. The processor must 

require the distributor to notify it of 

such sales, on a monthly basis, through 

automated sales reports or other 

submission, which may include e-mail 

or other electronic means. We propose 

to include these requirements in the 

new § 250.36(e). 

In current § 250.30(d)(1)(iii), the 

processor may sell end products to the 

distributing or recipient agency under 

an alternate method of end product 

sales that is approved by FNS and the 

distributing agency. In current 

§ 250.30(e)(1)(iii), the distributor may 

also sell end products under such an 

approved alternate method of sales. 

Such alternate methods of sale must 

ensure that the distributing or recipient 

agency, as appropriate, receives credit 

for the value of donated foods contained 

in the end products. We propose to 

include this option for both processor 

and distributor in the new § 250.36(f). 

In the new § 250.36(g), we propose to 

clarify that the processing agreement 

value of the donated foods must be used 

in crediting for donated foods in end 

product sales, and to refer to the 

definition of processing agreement value 

included in § 250.3. In the new 

§ 250.36(h), we propose to require that 

the distributing agency provide the 

processor with a list of recipient 

agencies eligible to purchase end 

products, along with the quantity of raw 

donated food that is to be delivered to 

the processor for processing on behalf of 

each recipient agency. This would 

ensure that only eligible recipient 

agencies receive end products, and in 

the amounts for which they are eligible. 

For end products sold through 

distributors, we propose to require that 

the processor provide the distributor 

with a list of eligible recipient agencies, 

and the quantities of end products that 

they are eligible to receive. 

8. Reports, Records, and Reviews of 

Processor Performance, § 250.37 

In the new § 250.37, we propose to 

include the reporting and recordkeeping 

requirements for the processing of 

donated foods, and the use of such 

reports and records to review processor 

performance. In current § 250.30(m), the 

processor must submit a monthly 

performance report to the distributing 

agency, including the following 

information for the reporting period, 

with year-to-date totals: 

(1) A list of all eligible recipient 

agencies; 

(2) The quantity of donated foods on 

hand at the beginning of the reporting 

period; 

(3) The quantity of donated foods 

received; 

(4) The quantity of donated foods 

transferred to the processor from 

another entity, or transferred by the 

processor to another entity; 

(5) The quantity of end products 

delivered to each eligible recipient 

agency; and 

(6) The quantity of donated foods 

remaining at the end of the reporting 

period. 

In the new § 250.37(a), we propose to 

retain the requirement that the 

processor submit the performance report 

to the distributing agency on a monthly 

basis, to describe its processing of 

donated foods. We propose to retain all 

of the currently required information in 

the report with the exception of a list of 

eligible recipient agencies, as the 

distributing agency would already have 

this information. We propose to require 

that the processor also include grading 

certificates and other documentation, as 

requested by the distributing agency, to 

support the information included in the 

performance reports. Such 

documentation may include, for 

example, bills of lading, invoices, or 

copies of refund payments to verify 

sales and delivery of end products to 

recipient agencies. However, we 

propose to remove the requirement in 

current § 250.30(m)(1)(viii) that the 

processor submit sales verification 

findings obtained in accordance with 

current § 250.19(b)(2) along with the 

December and June performance 

reports. As discussed in section II.F of 

the preamble, we are proposing to 

remove the sales verification 

requirements in current § 250.19(b)(2). 

We propose to retain the current 

deadlines for the submission of 

performance reports in the new 

§ 250.37(a). However, we propose to 

remove the requirement in current 

§ 250.30(c)(4)(viii)(I) that the processor 

submit annual reconciliation reports. 

The June performance report serves to 

reconcile data that may have been 

submitted erroneously earlier in the 

year. 

In the new § 250.37(b), we propose to 

prohibit the processor from reporting 

reductions in donated food inventories 

on performance reports until sales of 

end products have been made, or until 

sales of end products through 

distributors have been verified. We 

propose to require that, when a 

distributor sells end products under a 

refund system, such verification must be 

through receipt of the distributing or 

recipient agency’s request for a refund; 

and, when a distributor sells end 

products under indirect discount or feefor-service, such verification must be 

through the distributor’s automated 

sales reports or other electronic or 

written submission. 

In the new § 250.37(c), we propose to 

require that a multi-State processor 

submit a summary performance report 


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to FNS, on a monthly basis, containing 

information from the performance 

report that would allow FNS to track the 

processor’s total and State-by-State 

donated food inventories, for the 

purpose of assessing the amount of the 

performance bond or letter of credit 

required of the processor under its 

National Processing Agreement. 

However, each distributing agency 

would still be responsible for 

monitoring the multi-State processor’s 

inventory of donated foods received for 

processing in the respective State, in 

accordance with the new § 250.37(a). 

As indicated in section II.C of the 

preamble, we propose to remove the 

specific recordkeeping requirements for 

processors included in current 

§ 250.16(a)(4) (redesignated as 

paragraph (a)(3) by this rule). However, 

in the new § 250.37(d), we propose to 

require processors to maintain specific 

records to demonstrate compliance with 

processing requirements in 7 CFR Part 

250, including, for example, assurance 

of receipt of donated food shipments, 

production, sale, and delivery of end 

products, and crediting for donated 

foods contained in end products. 

In accordance with current 

§ 250.16(a)(1)(i), accurate and complete 

records must be maintained with 

respect to end products processed from 

donated foods, but specific 

recordkeeping requirements for 

distributing agencies are not included. 

In the new § 250.37(e), we propose to 

require distributing agencies to maintain 

specific records to demonstrate 

compliance with processing 

requirements in 7 CFR Part 250, 

including, for example, end product 

data schedules, performance reports, 

copies of audits, and documentation of 

the correction of any deficiencies 

identified in such audits. 

In the new § 250.37(f), we propose to 

require recipient agencies to maintain 

specific records to demonstrate 

compliance with processing 

requirements in 7 CFR Part 250, 

including, for example, the receipt of 

end products purchased from processors 

or distributors, crediting for donated 

foods included in end products, and 

procurement documents. 

In accordance with current 

§ 250.19(b)(4), the distributing agency 

must make a continuing evaluation of 

processors and recipient agencies, 

through the review of performance 

reports and other reports and records, to 

ensure compliance with the 

requirements of 7 CFR Part 250. And, in 

accordance with current § 250.30(m)(3), 

the distributing agency must review and 

analyze reports submitted by processors 

to ensure compliance with such 

requirements. We propose to clarify the 

review requirements for the distributing 

agency in the new § 250.37(g), including 

the review of performance reports to 

ensure that the processor: 

(1) Receives donated food shipments, 

as applicable; 

(2) Delivers end products to eligible 

recipient agencies, in the types and 

quantities for which they are eligible; 

(3) Meets the required processing 

yields for donated foods under 

guaranteed minimum yield; and 

(4) Accurately reports donated food 

inventory activity and maintains 

inventories within approved levels. 

We propose to remove current 

requirements for the distributing agency 

to submit the following reports to FNS: 

• The final performance report for the 

year to the FNS Regional Office in 

accordance with current § 250.30(n)(4); 

and 

• The inventory portion of the 

performance report to the FNS Regional 

Office on a quarterly basis, in 

accordance with current § 250.30(o). 

We propose to remove the 

requirement in current 

§ 250.30(m)(1)(ix) that the processor 

provide certification that sufficient 

donated foods are on hand to meet 

processing obligations under its 

agreements, and that sufficient foods are 

in inventory to meet commercial 

obligations. We expect that, since a 

processor’s failure to meet processing 

obligations with respect to donated 

foods would result in either the 

distributing agency or FNS, as 

appropriate, calling in the performance 

bond or letter of credit, in accordance 

with the new § 250.32(b), a processor 

would be unlikely to maintain 

inventories insufficient to conduct its 

processing activities. We propose to 

remove the requirements in current 

§ 250.30(m)(2) and (n)(2) relating to the 

submission of reports and the 

performance of reviews to ensure that 

substitution of concentrated skim milk 

for donated nonfat dry milk is in 

compliance with requirements. As 

described in section II.A of the 

preamble, we are proposing to remove 

this substitution option under the 

revised definition of substitution in 

§ 250.3. Lastly, we propose to remove 

the provision in current § 250.30(n)(5) 

that prohibits distributing agencies from 

submitting food orders for processors 

that report no sales of end products 

during the prior year. While this would 

ordinarily be a good practice, it is the 

distributing agency’s decision to 

determine if a processor may effectively 

receive and process donated foods in a 

future period. 

9. Provisions of Agreements, § 250.38 

In the new § 250.38, we propose to 

include the required provisions for each 

type of processing agreement included 

in the new § 250.30, to ensure 

compliance with the requirements in 7 

CFR Part 250. In the new § 250.38(a), we 

propose to indicate that the National 

Processing Agreement includes 

provisions to ensure that a multi-State 

processor complies with all applicable 

requirements relating to the processing 

of donated foods. FNS has developed a 

prototype National Processing 

Agreement that includes all such 

required provisions. 

In the new § 250.38(b), we propose to 

require that the State Participation 

Agreement with a multi-State processor 

contain specific provisions or 

attachments to assure compliance with 

requirements in 7 CFR Part 250 that are 

not included in the multi-State 

processor’s National Processing 

Agreement. Such provisions include, for 

example, a list of recipient agencies 

eligible to receive end products, 

summary end product data schedules 

that contain a list of end products that 

may be sold in the State, and the 

allowed method(s) of end product sales 

implemented by the distributing agency. 

In the new § 250.38(c), we propose to 

require that the State Processing 

Agreement contain specific provisions 

or attachments to assure compliance 

with requirements in 7 CFR Part 250. 

Most of these provisions are included in 

current § 250.30(c)(4) and include, for 

example, assurance that the processor 

will meet processing yields for donated 

foods and substitution requirements, 

report donated food inventory activity 

and maintain inventories within 

approved levels, credit recipient 

agencies for donated foods contained in 

end products, and obtain required 

audits. 

In accordance with the new 

§ 250.38(d), we propose to require that 

the Recipient Processing Agreement 

contain the same provisions as a State 

Processing Agreement, to the extent that 

the distributing agency permits the 

recipient agency to monitor compliance 

with the applicable processing 

requirements (e.g., approval of end 

product data schedules or review of 

performance reports). However, a list of 

recipient agencies eligible to receive end 

products need not be included. 

In the new § 250.38(e), we propose to 

prohibit the distributing or recipient 

agency, as appropriate, from extending 

or renewing an agreement if the 

processor has not complied with 

processing requirements. We propose to 

indicate that the distributing or 


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recipient agency may immediately 

terminate the agreement in the event of 

such noncompliance. 

10. Miscellaneous Provisions, § 250.39 

In current § 250.30(t), FNS may waive 

any of the requirements in 7 CFR Part 

250 for the purpose of conducting 

demonstration projects to determine if 

processing of donated foods may be 

performed more efficiently or effectively 

by other means. We propose to include 

this provision without change in the 

new § 250.39(a). 

In the new § 250.39(b), we propose to 

clarify that guidance or information 

relating to the processing of donated 

foods is included on the FNS Web site 

at http://www.fns.usda.gov/fdd, or may 

otherwise be obtained from FNS. Such 

guidance and information includes 

program regulations and policies, the 

processing handbook, the FNS Audit 

Guide, and National Processing 

Agreement and summary end product 

data schedule prototypes. 

We propose to remove the 

requirement in current § 250.30(s) that 

the distributing agency develop and 

provide a processing manual or similar 

materials to processors and other 

parties. The information described 

above should provide sufficient 

guidance for processors and other 

parties to permit compliance with 

requirements for the processing of 

donated foods. The distributing agency 

may provide additional information 

relating to State-specific processing 

procedures upon request. 

III. Procedural Matters 

A. Public Comment Procedures 

Your written comments on this 

proposed rule should be specific, 

confined to issues pertinent to the 

proposed rule, and should explain your 

reasons for any change recommended. 

Where possible, you should reference 

the specific section or paragraph of the 

proposal you are addressing. Comments 

received after the close of the comment 

period (see DATES) will not be 

considered or included in the 

Administrative Record for the final rule. 

The comments, including names, 

street addresses, and other contact 

information of commenters, will be 

available for public review at the Food 

and Nutrition Service, Room 500, 3101 

Park Center Drive, Alexandria, Virginia, 

during regular business hours (8:30 a.m. 

to 5 p.m.), Mondays through Fridays, 

except Federal holidays. 

Executive Order 12866 requires each 

agency to write regulations that are 

simple and easy to understand. We 

invite your comments on how to make 

these regulations easier to understand, 

including answers to questions such as 

the following: 

(1) Are the requirements in the rule 

clearly stated? 

(2) Does the rule contain technical 

language or jargon that interferes with 

its clarity? 

(3) Does the format of the rule 

(grouping and order of sections, use of 

headings, paragraphing, etc.) make it 

more or less clear? 

(4) Would the rule be easier to 

understand if it were divided into more 

(but shorter) sections? 

(5) Is the description of the rule in the 

preamble sections entitled 

‘‘Background’’ and ‘‘Discussion of the 

Rule’s Provisions’’ helpful in 

understanding the rule? How could this 

description be more helpful? 

B. Executive Order 12866 

This proposed rule has been 

determined to be not significant and 

was not reviewed by the Office of 

Management and Budget (OMB) under 

Executive Order 12866. 

C. Regulatory Flexibility Act 

This proposed rule has been reviewed 

with regard to the requirements of the 

Regulatory Flexibility Act (5 U.S.C. 

601–612). Roberto Salazar, 

Administrator of the Food and Nutrition 

Service, has certified that this action 

will not have a significant impact on a 

substantial number of small entities. 

Although the rule would require 

specific procedures for processors and 

distributing and recipient agencies to 

follow in the processing of donated 

foods, USDA does not expect them to 

have a significant impact on such 

entities. 

D. Public Law 104–4 

Title II of the Unfunded Mandates 

Reform Act of 1995 (UMRA), Public 

Law 104–4, establishes requirements for 

Federal agencies to assess the effects of 

their regulatory actions on State, local, 

and tribal governments and the private 

sector. Under Section 202 of the UMRA, 

FNS generally must prepare a written 

statement, including a cost-benefit 

analysis, for proposed and final rules 

with Federal mandates that may result 

in expenditures to State, local, or tribal 

governments, in the aggregate, or to the 

private sector, of $100 million or more 

in any one year. When such a statement 

is needed for a rule, section 205 of the 

UMRA generally requires FNS to 

identify and consider a reasonable 

number of regulatory alternatives and 

adopt the least costly, more costeffective or least burdensome alternative 

that achieves the objectives of the rule. 

This rule contains no Federal mandates 

(under the regulatory provisions of Title 

II of the UMRA) for State, local, and 

tribal governments or the private sector 

of $100 million or more in any one year. 

This rule is, therefore, not subject to the 

requirements of sections 202 and 205 of 

the UMRA. 

E. Executive Order 12372 

The donation of foods in USDA food 

distribution and child nutrition 

programs is included in the Catalog of 

Federal Domestic Assistance under 

10.550. For the reasons set forth in the 

final rule in 7 CFR Part 3015, Subpart 

V and related Notice (48 FR 29115, 

June 24, 1983), the donation of foods in 

such programs is included in the scope 

of Executive Order 12372, which 

requires intergovernmental consultation 

with State and local officials. 

F. Executive Order 13132 

Executive Order 13132 requires 

Federal agencies to consider the impact 

of their regulatory actions on State and 

local governments. Where such actions 

have federalism implications, agencies 

are directed to provide a statement for 

inclusion in the preamble to the 

regulations describing the agency’s 

considerations in terms of the three 

categories called for under section 

(6)(b)(2)(B) of Executive Order 13132. 

1. Prior Consultation With State 

Officials 

The programs affected by the 

regulatory proposals in this rule are all 

State-administered, Federally-funded 

programs. Hence, our national 

headquarters office has formal and 

informal discussions with State and 

local officials, as well as processors, on 

an ongoing basis regarding program 

issues relating to the processing of 

donated foods. FNS attends annual 

conferences of the American 

Commodity Distribution Association, a 

national group with State, local, and 

industry representation, and the School 

Nutrition Association, as well as other 

conferences. 

2. Nature of Concerns and the Need To 

Issue This Rule 

The rule addresses the concerns of 

program operators that use donated 

foods to provide the school lunches and 

other meals in NSLP and other 

programs, as well as the processors that 

process the donated foods into finished 

end products on their behalf. The rule 

would reduce the workload for all 

parties involved in the processing of 

donated foods, and would facilitate the 

more efficient processing and delivery 

of end products. 


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3. Extent To Which We Meet Those 

Concerns 

FNS has considered the impact of the 

proposed rule on State and local 

agencies. The overall effect of this rule 

is to better ensure that such agencies 

receive the greatest benefit from donated 

foods through their processing into end 

products by commercial processors. 

G. Executive Order 12988 

This proposed rule has been reviewed 

under Executive Order 12988, Civil 

Justice Reform. This proposed rule, 

when finalized, would have preemptive 

effect with respect to any State or local 

laws, regulations, or policies which 

conflict with its provisions or which 

would otherwise impede its full 

implementation. This proposed rule 

would not have retroactive effect. Prior 

to any judicial challenge to the 

provisions of this rule or the application 

of its provisions, all applicable 

administrative procedures must be 

exhausted. 

H. Civil Rights Impact Analysis 

FNS has reviewed this rule in 

accordance with the Department 

Regulation 4300–4, ‘‘Civil Rights Impact 

Analysis’’, to identify and address any 

major civil rights impacts the rule might 

have on minorities, women, and persons 

with disabilities. After a careful review 

of the rule’s intent and provisions, FNS 

has determined that this rule will not in 

any way limit or reduce the ability of 

participants to receive the benefits of 

donated foods on the basis of an 

individual’s or group’s race, color, 

national origin, sex, age, or disability. 

FNS found no factors that would 

negatively and disproportionately affect 

any group of individuals. 

I. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(44 U.S.C. chap. 35; see 5 CFR part 

1320) requires that OMB approve all 

collections of information by a Federal 

agency from the public before they can 

be implemented. Respondents are not 

required to respond to any collection of 

information unless it displays a current 

valid OMB control number. This 

proposed rule contains information 

collections that are subject to review 

and approval by OMB; therefore, in 

accordance with the Paperwork 

Reduction Act of 1995, this notice 

invites the general public and other 

agencies to comment on the proposed 

information collections affected by the 

proposals in the rule. Written comments 

on this proposed information collection 

must be received on or before October 

23, 2006. 

Comments concerning the 

information collection aspects of this 

proposed rule should be sent to the 

Office of Information and Regulatory 

Affairs, OMB, Room 10235, New 

Executive Office Building, Washington, 

DC 20503, Attention: Desk Officer for 

the Food and Nutrition Service. A copy 

of these comments may also be sent to 

Lillie F. Ragan, at the address listed in 

the ADDRESSES section of this preamble. 

Commenters are asked to separate their 

comments on the information collection 

requirements from their comments on 

the remainder of the proposed rule. 

OMB is required to make a decision 

concerning the collection of information 

contained in this proposed regulation 

between 30 to 60 days after the 

publication of this document in the 

Federal Register. Therefore, a comment 

to OMB is best assured of having full 

consideration if OMB receives it within 

30 days of publication. This does not 

affect the deadline for the public to 

comment to the Department on the 

proposed regulation. 

Comments are invited on: (a) Whether 

the proposed collection of information 

is necessary for the proper performance 

of the functions of the agency, including 

whether the information will have 

practical utility; (b) the accuracy of the 

agency’s estimate of the burden of the 

proposed collection of information, 

including the validity of the 

methodology and assumptions used; (c) 

ways to enhance the quality, utility, and 

clarity of the information to be 

collected; (d) ways to minimize the 

burden of the collection of information 

on those who are to respond, including 

use of appropriate automated, 

electronic, mechanical, or other 

technological collection techniques or 

other forms of information technology. 

The title, description, and respondent 

description of the information 

collections affected by this rule are 

shown below, with an estimate of the 

annual reporting and recordkeeping 

burdens. These burden hours represent 

proposed changes to current reporting 

and recordkeeping requirements, and 

incorporate some additional proposed 

requirements. 

Title: Food Distribution Regulations 

and Forms. 

OMB Number: 0584–0293. 

Expiration Date: March 31, 2009. 

Type of Request: Revision of a 

currently approved collection. 

Abstract: This proposed rule would 

affect only the reporting and 

recordkeeping requirements under 7 

CFR Part 250 described in the following 

paragraphs and indicated in the tables. 

1. Reporting Requirements 

Section 250.18, Audits. The reporting 

burden relating to audit requirements 

would be reduced from 240 hours to 170 

hours. Although distributing agencies 

would have to review audits required of 

in-State processors, in addition to those 

currently required of multi-State 

processors, the time required for each 

response would be reduced from the 

current 4 hours to 2 hours. 

Section 250.30, Processing 

agreements. The reporting burden 

relating to the execution of processing 

agreements would be reduced from 324 

hours to 245 hours. The reduction is the 

result of our proposal, in the new 

§ 250.30(c), to permit distributing 

agencies to sign more abbreviated State 

Participation Agreements with multiState processors (which must have 

National Processing Agreements), rather 

than the currently required State 

Processing Agreements. This would 

reduce the estimated time required for 

each response from 2 hours to 0.636 

hours. Currently, in § 250.30(l), 

distributing agencies must provide 

copies of processing agreements to FNS. 

We are proposing to remove this 

requirement. Hence, the reporting 

burden for this activity would be 

reduced from 456 hours to 0 hours. 

Section 250.36, End product sales. 

The reporting burden relating to the 

verification of end product sales would 

be reduced from 4,018.50 hours to 1,410 

hours. This is a result of our proposal, 

in the new § 250.36(b), to permit 

distributing or recipient agencies, as 

appropriate, to submit requests for 

refunds to processors by e-mail or other 

electronic means, rather than by written 

submission, which would reduce the 

time required for each response from 

0.57 hours to 0.20 hours. 

Section 250.37, Performance reports. 

The burden relating to the review of 

performance reports submitted by 

processors would increase from 4,500 

hours to 10,350 hours. This is the result 

of the increase in the number of 

processors with which distributing 

agencies have agreements to process 

donated foods into end products. In the 

new § 250.37, we propose to include as 

respondents the 50 distributing agencies 

that must review the performance 

reports submitted by processors. Each 

distributing agency has a processing 

agreement with, on average, 23 

processors, each of which submits 9 

performance reports annually. Hence, 

each distributing agency must review 

207 performance reports annually, 

resulting in a total of 10,350 annual 

responses. As each response would take 


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1 hour, the reporting burden for this 

activity would be 10,350 hours. 

In current § 250.30, the submission of 

forms FNS–519A and FNS–519B as 

processor’s monthly performance 

reports and inventory reports is listed 

erroneously. Hence, we propose to 

remove the 1,560 burden hours 

currently listed under this submission. 

In current §§ 250.17(b) and 250.30(o), 

distributing agencies must complete and 

submit a processing inventory report to 

FNS on a quarterly basis. We are 

proposing to remove this requirement. 

Hence, the reporting burden for this 

activity would be reduced from 912 

hours to 0 hours. In current § 250.30(s), 

distributing agencies are required to 

develop and provide a processing 

manual or similar material to processors 

and recipient agencies. We are also 

proposing to remove this requirement. 

Hence, the reporting burden for this 

activity would be reduced from 18.81 

hours to 0 hours. 

2. Recordkeeping Requirements 

Section 250.18, Audits. The 

recordkeeping burden relating to audit 

requirements would increase from 9.90 

hours to 28.1 hours, as distributing 

agencies would have to maintain 

records of audit findings for in-State 

processors, in addition to the current 

requirement to maintain such records 

for multi-State processors. 

Section 250.30, Processing 

agreements. The recordkeeping burden 

relating to the execution of processing 

agreements would increase from 13.28 

hours to 31 hours, as a result of the 

increase in the number of processors 

that distributing agencies enter into 

agreements to process donated foods. 

Section 250.37, Records of processing 

activities. The current recordkeeping 

burden for the receipt of processed end 

products, performance reports, and 

other records related to the processing 

of donated foods is included under 

current §§ 250.16 and 250.30, which 

also include the burden for the 

maintenance of other records relating to 

the distribution and management of 

donated foods. In accordance with the 

new § 250.37(e), we are proposing to 

clarify the specific records that the 

distributing agency must maintain to 

ensure compliance with processing 

requirements, including records of end 

product data schedules, performance 

reports, grading certificates, the receipt 

of end products, etc. In the new 

§ 250.37(f), we are clarifying the 

recordkeeping requirements for 

recipient agencies, which would 

include records of the receipt of end 

products and of crediting for donated 

foods included in end products. 

However, the overall recordkeeping 

burden would remain unchanged from 

the current 9,200 hours. 

Respondents: State, local, or Tribal 

Government; Program participants; 

Business or other for-profit; Nonprofit 

institutions; Federal Government. 

Total Annual Responses: Current: 

1,642,762; Proposed: 1,659,358. 

Estimated Total Annual Burden on 

Respondents: Current: 1,085,814; 

Proposed: 1,104,505. 

The proposed changes in the 

reporting and recordkeeping 

requirements described above are 

included in the following tables. 

REPORTING

Current/proposed §§ Respondents 

Responses 

per year 

Total 

responses 

Hours/ 

response 

Total 

hours 

Current .......................................... 250.18(c) ....................................... 30 2 60 4 240 

Proposed ...................................... 250.18 ........................................... 50 1.7 85 2 170 

Current .......................................... 250.12(f) and 250.30(c) ................ 166 1 166 2 324 

Proposed ...................................... 250.30 ........................................... 50 7.7 385 0.636 245 

Current .......................................... 250.30(l) ........................................ 19 12 228 2 456 

Proposed ...................................... ....................................................... 0 0 0 0 0 

Current .......................................... 250.30(k) ....................................... 2,350 3 7,050 0.57 4,018.50 

Proposed ...................................... 250.36 ........................................... 2,350 3 7,050 0.20 1,410 

Current .......................................... 250.17(c) and 250.30(m) .............. 500 9 4,500 1 4,500 

Proposed ...................................... 250.37 ........................................... 50 207 10,350 1 10,350 

Current .......................................... 250.17(b) and 250.30(o) ............... 57 4 228 4 912 

Proposed ...................................... ....................................................... 0 0 0 0 0 

Current .......................................... 250.30 ........................................... 57 1 57 0.33 18.81 

Proposed ...................................... ....................................................... 0 0 0 0 0 

Current .......................................... 250.30(m) ..................................... 40 13 520 3 1,560 

Proposed ...................................... ....................................................... 0 0 0 0 0 

Total: 

Current ................................... ....................................................... 3,219 3.97 12,809 0.940 12,037.31 

Proposed ............................... ....................................................... 2,500 7.15 17,870 0.685 12,175 

RECORDKEEPING

Current/proposed §§ Respondents 

Responses 

per year 

Total 

responses 

Hours/ 

response 

Total 

hours 

Current .......................................... 250.18(b) ...................................... 30 1 30 0.33 9.90 

Proposed ...................................... 250.18 ........................................... 50 1.7 85 0.33 28.1 

Current .......................................... 250.12(f) ....................................... 166 1 166 0.08 13.28 

Proposed ...................................... 250.30 ........................................... 50 7.7 385 0.08 30.8 

Current .......................................... 250.16 and 250.30 ....................... 115,000 1 115,000 0.08 9,200 

Proposed ...................................... 250.37 ........................................... 115,000 1 115,000 0.08 9,200 

Total: 

Current ................................... ....................................................... 115,196 1 115,196 0.08 9,223.18 

Proposed ............................... ....................................................... 115,100 1 115,470 0.08 9,259 


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J. E-Government Act Compliance 

FNS is committed to complying with 

the E-Government Act, to promote the 

use of the Internet and other 

information technologies, to provide 

increased opportunities for citizen 

access to government information and 

services, and for other purposes. In 

accordance with current practice, and as 

clarified in this rule, distributing and 

recipient agencies, and processors, may, 

in most cases, submit required 

information electronically, including 

through e-mail or other means. For 

example, the rule clarifies that recipient 

agencies may submit requests for 

refunds for the value of donated foods 

in processed end products by e-mail or 

other electronic submission. 

List of Subjects in 7 CFR Part 250 

Administrative practice and 

procedure, Food assistance programs, 

Grant programs, Social programs, 

Indians, Reporting and recordkeeping 

requirements, Surplus agricultural 

commodities. 

Accordingly, 7 CFR Part 250 is 

proposed to be amended as follows: 

PART 250–DONATION OF FOODS FOR 

USE IN THE UNITED STATES, ITS 

TERRITORIES AND POSSESSIONS 

AND AREAS UNDER ITS 

JURISDICTION 

1. The authority citation for Part 250 

continues to read as follows: 

Authority: 5 U.S.C. 301; 7 U.S.C. 612c, 

612c note, 1431, 1431b, 1431e, 1431 note, 

1446a–1, 1859, 2014, 2025; 15 U.S.C. 713c; 

22 U.S.C. 1922; 42 U.S.C. 1751, 1755, 1758, 

1760, 1761, 1762a, 1766, 3030a, 5179, 5180. 

2. In § 250.3: 

a. Remove definitions of Contract 

value of the donated foods, Contracting 

agency, Discount system, Fee-forservice, Refund, Refund application, 

Refund system, and Substituted food. 

b. Revise definitions of Distributor, 

Multi-State processor and Substitution. 

c. Add definitions, in the appropriate 

alphabetical order, of Backhauling, 

Commingling, End product data 

schedule, In-State processor, National 

Processing Agreement, Processing 

agreement value, Recipient Processing 

Agreement, Replacement value, 7 CFR 

3052, Split shipment, State 

Participation Agreement, and State 

Processing Agreement. 

The revisions and additions read as 

follows: 

§ 250.3 Definitions. 

Backhauling means the delivery of 

donated foods to a processor for 

processing from a recipient agency’s 

storage facility. 

* * * * * 

Commingling means the storage of 

donated foods together with 

commercially purchased foods. 

* * * * * 

Distributor means a commercial 

enterprise that sells and/or delivers 

finished end products, or stores and 

distributes donated foods, to 

distributing or recipient agencies. 

* * * * * 

End product data schedule means a 

processor’s description of the processing 

of donated food into a finished end 

product, including the processing yield 

of donated food. 

* * * * * 

In-State processor means a processor 

that has entered into agreements with 

distributing or recipient agencies that 

are located only in the State in which 

the processor’s facilities or office is 

located. 

Multi-State processor means a 

processor that has entered into 

agreements with distributing or 

recipient agencies in more than one 

State, or that has entered into 

agreements with distributing or 

recipient agencies that are located in a 

State other than the State in which the 

processor’s processing facility is 

located. 

National Processing Agreement means 

an agreement between FNS and a multiState processor to process donated foods 

into end products for sale to distributing 

or recipient agencies. 

* * * * * 

Processing agreement value means the 

specific commodity file value for 

donated food assigned by the 

Department that reflects the 

Department’s cost of purchase, delivery, 

and processing of the donated food, as 

applicable. 

* * * * * 

Recipient Processing Agreement 

means a recipient agency’s agreement 

with a processor to process donated 

foods and purchase the finished end 

products. 

* * * * * 

Replacement value means the specific 

commodity file value assigned by the 

Department to ensure compensation for 

donated foods lost in processing or 

other activities. 

* * * * * 

7 CFR Part 3052 means the 

Department’s regulations establishing 

audit requirements for State and local 

governments and nonprofit 

organizations that receive Federal 

grants. 

* * * * * 

Split shipment means a shipment of 

donated foods with more than one stopoff or delivery location, or a shipment 

to one delivery location that is split 

between two different distributing 

agencies. 

* * * * * 

State Participation Agreement means 

a distributing agency’s agreement with a 

multi-State processor to permit the sale 

of finished end products produced 

under the processor’s National 

Processing Agreement to eligible 

recipient agencies in the State, or to 

directly purchase such finished end 

products. 

State Processing Agreement means a 

distributing agency’s agreement with a 

processor to process donated foods into 

finished end products for sale to eligible 

recipient agencies, or to the distributing 

agency. 

* * * * * 

Substitution means the use of 

commercially purchased foods in place 

of donated foods in accordance with the 

requirements of this part. 

* * * * * 

3. In § 250.13, revise paragraph (c) to 

read as follows: 

§ 250.13 Distribution and control of 

donated foods. 

* * * * * 

(c) Transfer of title. Title to donated 

foods transfers to the distributing 

agency or recipient agency, as 

appropriate, upon acceptance of the 

donated foods at the time and place of 

delivery, with the following exception. 

Title to donated foods provided to a 

multi-State processor, in accordance 

with its National Processing Agreement, 

transfers to the distributing agency or 

recipient agency, as appropriate, upon 

acceptance of the finished end products 

at the time and place of delivery. 

Notwithstanding transfer of title, the 

distributing agency must ensure that 

donated foods and end products are 

used in accordance with the 

requirements of this part. 

* * * * * 

4. In § 250.16: 

a. Remove paragraph (a)(3). 

b. Redesignate paragraphs (a)(4), 

(a)(5), and (a)(6) as paragraphs (a)(3), 

(a)(4), and (a)(5), respectively. 

c. Revise newly redesignated 

paragraph (a)(3) to read as follows: 

§ 250.16 Maintenance of records. 

(a) * * * 

(3) Processors and food service 

management companies must comply 


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with the applicable recordkeeping 

requirements in this part, and with any 

other recordkeeping requirements 

included in their agreements or 

contracts. Storage facilities and 

distributors must maintain records 

documenting the receipt, distribution, 

inventory, and disposal of donated 

foods sufficient to ensure compliance 

with requirements in this part, and with 

any other such requirements in their 

agreements or contracts with 

distributing or recipient agencies. 

* * * * * 

5. In § 250.17: 

a. Remove paragraphs (b) and (f). 

b. Redesignate paragraphs (c), (d), and 

(e), as paragraphs (b), (c), and (d), 

respectively. 

c. Revise newly redesignated 

paragraph (b) to read as follows: 

§ 250.17 Reports. 

* * * * * 

(b) Processor performance. Processors 

must submit performance reports and 

other supporting documentation, as 

required by the distributing agency or 

by FNS, in accordance with § 250.37, to 

ensure compliance with requirements in 

this part. 

* * * * * 

6. Revise § 250.18 to read as follows: 

§ 250.18 Audits. 

(a) Requirements for distributing and 

recipient agencies. In accordance with 

Departmental regulations in 7 CFR Part 

3052 and OMB Circular A–133, a State 

or local government or nonprofit 

organization that expends at least 

$500,000 in Federal grants or awards 

(i.e., funds and/or donated foods) in a 

school or fiscal year must obtain a single 

audit for that year. A program-specific 

audit may be substituted for a single 

audit if the auditee operates only one 

Federal program (or one recognized 

cluster of programs). A State or local 

government or nonprofit organization 

that expends less than $500,000 in 

Federal grants or awards in a school 

year or fiscal year is not required to 

have an audit for that year. The value 

of donated foods used in determining if 

an audit is required must be the value 

assigned by the distributing agency, in 

accordance with § 250.13(a)(5). 

Recipient agencies utilizing a single 

inventory management system must 

consider the value of all donated foods 

received for the year, rather than the 

value of donated foods actually used. 

(For availability of the OMB circular 

mentioned in this paragraph, please 

refer to 5 CFR 1310.3). 

(b) Requirements for processors. InState processors must obtain an 

independent certified public accountant 

(CPA) audit in the first year that they 

receive donated foods for processing, 

while multi-State processors must 

obtain such an audit in each of the first 

three years that they receive donated 

foods for processing. After this initial 

requirement period, an in-State 

processor must obtain an independent 

CPA audit every three years, while a 

multi-State processor must obtain such 

an audit at a frequency determined by 

the average value of donated foods it 

receives for processing per year, as 

indicated in this paragraph (b). The 

value of donated foods used in 

determining if an audit is required must 

be the value assigned by the distributing 

agency, in accordance with 

§ 250.13(a)(5). The audit must determine 

that the processor’s performance is in 

compliance with the requirements in 

this part, and must be conducted in 

accordance with procedures in the FNS 

Audit Guide for Processors. All 

processors must pay for audits required 

in this paragraph (b). A multi-State 

processor must obtain an audit: 

(1) Annually, if it receives, on 

average, more than $5,000,000 in 

donated foods for processing per year; 

(2) Every two years, if it receives, on 

average, between $1,000,000 and 

$5,000,000 in donated foods for 

processing per year; or 

(3) Every three years, if it receives, on 

average, less than $1,000,000 in donated 

foods for processing per year. 

(c) Required actions resulting from 

audit. The distributing or recipient 

agency, as appropriate, must submit 

reports and corrective action plans, and 

undertake corrective actions in response 

to the audit, in accordance with the 

requirements in 7 CFR Part 3052. A 

multi-State processor must ensure that a 

copy of the audit is provided to FNS, 

and an in-State processor must ensure 

that a copy of the audit is provided to 

the distributing agency, by December 

31st of each year in which an audit is 

required. Along with the audit, the 

processor must provide verification to 

FNS or the distributing agency, as 

appropriate, that all deficiencies 

identified in the audit have been 

corrected, or must provide a corrective 

action plan with timelines for correcting 

all deficiencies identified in the audit. 

(d) Failure to meet audit 

requirements. A distributing or recipient 

agency is subject to sanctions for failure 

to obtain the required audit, or for 

failure to correct deficiencies identified 

in the audit, including the withholding, 

suspension, or termination of a Federal 

award. FNS may terminate a processor’s 

National Processing Agreement, or 

prohibit the further distribution of 

donated foods to a processor, for its 

failure to obtain the required audit, or 

its failure to correct deficiencies 

identified in the audit. A distributing or 

recipient agency may terminate an 

agreement with a processor, and must 

not extend or renew such an agreement, 

for the same reasons, in accordance with 

§ 250.38(e). 

(e) Departmental audits or 

inspections. The Department, the 

Comptroller General of the United 

States, or any of their authorized 

representatives, may conduct audits or 

inspections of distributing, 

subdistributing, or recipient agencies, or 

the commercial enterprises with which 

they have contracts or agreements, to 

assure compliance with the 

requirements of this part. 

§ 250.19 [Amended] 

7. In § 250.19: 

a. Remove paragraph (b)(1)(iii), and 

redesignate paragraphs (b)(1)(iv) and 

(b)(1)(v) as paragraphs (b)(1)(iii) and 

(b)(1)(iv), respectively. 

b. Remove paragraph (b)(2), and 

redesignate paragraphs (b)(3), (b)(4), 

(b)(5), and (b)(6) as paragraphs (b)(2), 

(b)(3), (b)(4), and (b)(5), respectively. 

c. Remove the undesignated text 

appearing after newly redesignated 

paragraph (b)(2)(iv). 

8. In § 250.24, revise paragraph (g) to 

read as follows: 

§ 250.24 Distributing agency performance 

standards. 

* * * * * 

(g) Processing. The distributing 

agency must provide for the processing 

of donated foods in accordance with 

Subpart C of this part, and must ensure 

that recipient agencies are aware of the 

processing options available to them. In 

accordance with § 250.30(g), the 

distributing agency must provide for 

testing of end products to ensure their 

acceptability by recipient agencies 

before entering into processing 

agreements. The distributing agency 

must develop a system to monitor 

product acceptability on a periodic 

basis. 

9. Revise Subpart C to read as follows: 

Subpart C—Processing of Donated Foods 

Sec. 

250.30 Types of processing agreements. 

250.31 Procurement requirements. 

250.32 Protection of donated food value. 

250.33 Processing yields of donated foods. 

250.34 Substitution of donated foods. 

250.35 Storage, inspection, quality control, 

and inventory management. 

250.36 End product sales and crediting for 

the value of donated foods. 

250.37 Reports, records, and reviews of 

processor performance. 

250.38 Provisions of agreements. 

250.39 Miscellaneous provisions. 


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Subpart C—Processing of Donated 

Foods 

§ 250.30 Types of processing agreements. 

(a) Purpose of processing donated 

foods. Donated foods are most 

commonly provided to processors to 

process into approved end products that 

are more suitable for use in school 

lunch programs or other food services 

provided by recipient agencies. For 

example, a whole chicken or chicken 

parts may be processed into chicken 

nuggets for use in the National School 

Lunch Program. However, in some cases 

donated foods are provided to 

processors to prepare meals, or for 

repackaging. A processor’s use of a 

commercial facility to repackage 

donated foods, or to use donated foods 

in the preparation of meals, is 

considered processing in this part. 

(b) Agreement requirement. The 

processing of donated foods must be 

performed in accordance with an 

agreement between the processor and 

FNS, between the processor and the 

distributing agency, or, if allowed by the 

distributing agency, between the 

processor and a recipient agency or 

subdistributing agency. However, a 

processing agreement will not obligate 

the distributing, subdistributing, or 

recipient agency, or the Department, to 

provide donated foods to a processor for 

processing. For donated foods received 

in child nutrition programs, the 

distributing agency must provide the 

State administering agency (if a different 

agency) with an opportunity to review 

its processing agreements to ensure 

compliance with nutritional and 

labeling requirements. The different 

types of processing agreements are 

described in this section. 

(c) National Processing Agreement. A 

multi-State processor must enter into a 

National Processing Agreement with 

FNS in order to process donated foods 

into end products in accordance with 

end product data schedules approved by 

FNS. FNS also holds and manages the 

processor’s performance bond or letter 

of credit under the National Processing 

Agreement, in accordance with § 250.32. 

FNS does not itself procure or purchase 

end products under a National 

Processing Agreement. A multi-State 

processor must also enter into a State 

Participation Agreement with the 

distributing agency in order to sell 

nationally approved end products in the 

State, in accordance with paragraph (d) 

of this section. 

(d) State Participation Agreement. 

The distributing agency must enter into 

a State Participation Agreement with a 

multi-State processor to permit the sale 

of finished end products produced 

under the processor’s National 

Processing Agreement to eligible 

recipient agencies in the State, or to 

directly purchase such finished end 

products. The distributing agency may 

include other State-specific processing 

requirements in its State Participation 

Agreement, such as the methods of end 

product sales permitted, in accordance 

with § 250.36, or the use of labels 

attesting to fulfillment of meal pattern 

requirements in child nutrition 

programs. 

(e) State Processing Agreement. A 

distributing agency must enter into a 

State Processing Agreement with an inState processor to process donated foods 

into finished end products. The 

distributing agency may also choose to 

provide donated foods for processing to 

a multi-State processor under such an 

agreement, rather than utilize the 

National Processing Agreement. Under a 

State Processing Agreement, the 

distributing agency approves end 

product data schedules submitted by the 

processor, holds and manages the 

processor’s performance bond or letter 

of credit, in accordance with § 250.32, 

and assures compliance with other 

processing requirements. The 

distributing agency may purchase the 

finished end products for distribution to 

eligible recipient agencies in the State 

under a State Processing Agreement, or 

may choose to select a number of 

processors with which it enters into 

such agreements, and permit recipient 

agencies to purchase finished end 

products from them, in accordance with 

applicable procurement requirements. 

The latter type of State Processing 

Agreement is called a master agreement. 

In selecting processors with which it 

enters into master agreements, the 

distributing agency must develop 

selection criteria, which must include 

the following: 

(1) The nutritional contribution 

provided by end products; 

(2) The marketability or acceptability 

of end products; 

(3) The means by which end products 

will be distributed; 

(4) Prices of end products and 

processing yields of donated foods; 

(5) Any applicable labeling 

requirements; and 

(6) The processor’s record of ethics 

and integrity, and capacity to meet 

regulatory requirements. 

(f) Recipient Processing Agreement. 

The distributing agency may permit a 

recipient agency to enter into an 

agreement with a processor to process 

donated foods and to purchase the 

finished end products in accordance 

with a Recipient Processing Agreement. 

A recipient agency may also enter into 

a Recipient Processing Agreement on 

behalf of other recipient agencies, in 

accordance with an agreement between 

the parties. The distributing agency may 

also permit a recipient agency to 

approve end product data schedules or 

select nationally approved end product 

data schedules, review processor 

performance reports, and monitor other 

processing activities under a Recipient 

Processing Agreement. All such 

activities must be performed in 

accordance with the requirements of 

this part. All Recipient Processing 

Agreements must be reviewed and 

approved by the distributing agency. 

(g) Ensuring acceptability of end 

products. The distributing agency must 

provide for testing of end products to 

ensure their acceptability by recipient 

agencies prior to entering into State 

Processing Agreements or State 

Participation Agreements. End products 

that have previously been tested, or that 

are otherwise determined to be 

acceptable, need not be tested. The 

distributing agency, or its recipient 

agencies, must monitor product 

acceptability on an ongoing basis. 

(h) Prohibition against subcontracting. 

A processor may not assign any 

processing activities under its 

processing agreement, or subcontract 

with another entity to perform any 

aspect of processing, without the 

specific written consent of the other 

party to the agreement (i.e., distributing, 

subdistributing, or recipient agency, or 

FNS, as appropriate). The distributing 

agency may, for example, provide the 

required consent as part of its State 

Participation Agreement with the 

processor. 

(i) Duration of agreements. An 

agreement between a distributing, 

subdistributing, or recipient agency and 

a processor may be up to five years in 

duration. National Processing 

Agreements are permanent. 

Amendments to any agreements may be 

made as needed, with the concurrence 

of the parties to the agreement. Such 

amendments will be effective for the 

duration of the agreement, unless 

otherwise indicated. 

§ 250.31 Procurement requirements. 

(a) Applicability of Federal 

procurement requirements. Federal 

procurement requirements in 7 CFR 

Parts 3016 and 3019 pertain to the 

purchase of finished end products from 

processors or other processing services 

relating to donated foods. In conducting 

such procurements, distributing or 

recipient agencies may use procedures 

that conform to applicable State or local 

laws, as appropriate, but must ensure 


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compliance with Federal regulations in 

7 CFR Parts 3016 or 3019, as applicable. 

(b) Methods of procurement. In 

accordance with 7 CFR 3016.36 and 

3019.44, the distributing or recipient 

agency may use small purchase 

procedures in purchasing finished end 

products or other processing services 

from processors if the cost of the 

purchase does not exceed the simplified 

acquisition threshold fixed at 41 U.S.C. 

403(11) (currently set at $100,000). If the 

cost of such purchase exceeds that 

amount, the distributing or recipient 

agency must use sealed bids or 

competitive proposals in conducting the 

procurement. These methods of 

procurement are more fully explained in 

7 CFR 3016.36 and 3019.44. Federal 

requirements do not absolve the 

distributing or recipient agency from its 

obligation to comply with State or local 

procurement laws or procedures that are 

more stringent than the Federal 

requirements. 

(c) Required information in 

procurement documents. The 

procurement documents must include 

the following information: 

(1) The price to be charged for the 

finished end product or other 

processing service; 

(2) The method of end product sales 

that will be utilized; 

(3) The contract value of the donated 

food in the finished end products; and 

(4) The location for the delivery of the 

finished end products. 

§ 250.32 Protection of donated food value. 

(a) Performance bond or irrevocable 

letter of credit. The processor must 

obtain a performance bond or an 

irrevocable letter of credit to protect the 

value of donated foods that it is to 

receive for processing, prior to the 

delivery of the donated foods. The 

processor must provide the performance 

bond or letter of credit to the 

distributing agency, in accordance with 

its State Processing Agreement. The 

amount of the performance bond or 

letter of credit must be sufficient to 

cover the maximum value of donated 

foods, both raw and processed, that the 

processor is expected to maintain in 

inventory at any given time, as 

determined by the distributing agency. 

A multi-State processor must provide 

the performance bond or letter of credit 

to FNS, in accordance with its National 

Processing Agreement. The amount of 

the performance bond or letter of credit 

must be sufficient to cover the 

maximum value of donated foods that 

the processor is expected to maintain in 

its national inventory at any given time, 

as determined by FNS. The surety 

company from which a bond or letter of 

credit is obtained must be listed in the 

most current Department of Treasury 

Circular 570. 

(b) Calling in the performance bond or 

letter of credit. The distributing agency 

must call in the performance bond or 

letter of credit whenever a processor’s 

lack of compliance with Federal 

requirements, or with the terms of the 

State Processing Agreement, results in a 

loss of donated foods to the distributing 

or recipient agency, and the processor 

fails to make restitution or respond to a 

claim action initiated to recover the 

loss. FNS will call in the performance 

bond or letter of credit in the same 

circumstances, in accordance with 

National Processing Agreements, and 

will ensure that any monies recovered 

are reimbursed to distributing agencies 

for losses of entitlement foods. 

§ 250.33 Processing yields of donated 

foods. 

(a) End product data schedules. The 

processor must submit an end product 

data schedule for approval before it may 

process donated foods into end 

products. For State Processing 

Agreements, the end product data 

schedule must be approved by the 

distributing agency and, for donated 

foods processed under guaranteed 

return or standard yield, must also be 

approved by the Department. For 

National Processing Agreements, the 

end product data schedule must be 

approved by the Department. On the 

end product data schedule, the 

processor must describe its processing 

of donated food into an end product, 

including the information indicated in 

this paragraph (a). An end product data 

schedule must be submitted, and 

approved, for each new end product 

that a processor wishes to provide, or 

for a previously approved end product 

in which the ingredients (or other 

pertinent information) have been 

altered. In submitting the end product 

data schedule, the processor may use its 

own format, as long as all of the 

required information is included. The 

end product data schedule must include 

the following information: 

(1) A description of the end product; 

(2) The types and quantities of 

donated foods included; 

(3) The types and quantities of other 

ingredients included; 

(4) The quantity of end product 

produced; and 

(5) The processing yield of donated 

food, which may be expressed as the 

quantity (lbs. or cases) of donated food 

needed to produce a specific quantity of 

end product, or as the percentage of 

donated food returned in the finished 

end product. 

(b) 100 per cent yield. Processing of 

all donated foods except beef, pork, and 

poultry must be performed under 100 

percent yield. Under 100 percent yield, 

the processor must ensure that 100 

percent of the raw donated food is 

returned in the finished end product. 

The processor must replace any 

processing loss of donated food with 

commercially purchased food of the 

same generic identity, of U.S. origin, 

and of equal or better quality than the 

donated food. The processor must 

demonstrate such replacement by 

reporting reductions in donated food 

inventories on performance reports by 

the amount of donated food contained 

in the finished end product, rather than 

the amount that went into production. 

The Department may approve an 

exception if a processor experiences a 

significant manufacturing loss. 

(c) Guaranteed yield or return. Under 

guaranteed yield or return, the processor 

must ensure that a specific quantity of 

end product will be produced from a 

specific quantity of donated food, as 

determined by the parties to the 

processing agreement, and, for State 

Processing Agreements, approved by the 

Department. The guaranteed yield must 

be indicated on the end product data 

schedule. 

(d) Guaranteed minimum yield or 

return. Under guaranteed minimum 

yield or return, the processor must 

ensure that a specific minimum quantity 

of end product will be produced from a 

specific quantity of donated food in a 

production run, as indicated on the end 

product data schedule. If a larger 

quantity of end product than the 

guaranteed minimum is produced, the 

processor must provide the full quantity 

to the distributing or recipient agency, 

as appropriate, and that agency must 

pay the processor for the additional end 

products produced. 

(e) Standard yield. Under standard 

yield, the processor must ensure that a 

specific quantity of end product, as 

determined by the Department, will be 

produced from a specific quantity of 

donated food. The established standard 

yield is higher than the average yield 

under normal commercial production, 

and serves to reward those processors 

that can process donated foods most 

efficiently. The standard yield must be 

indicated on the end product data 

schedule. 

(f) Compensation for loss of donated 

foods. The processor must compensate 

the distributing or recipient agency, as 

appropriate, for the loss of donated 

foods, or for the loss of commercially 

purchased foods substituted for donated 

foods. Such loss may occur, for 

example, if the processor fails to meet 


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the required processing yield of donated 

food, if donated foods are spoiled, 

damaged, or otherwise adulterated at a 

processing facility, or if end products 

are improperly distributed. To 

compensate for such loss, the processor 

must: 

(1) Replace the lost donated food or 

commercial substitute with 

commercially purchased food of the 

same generic identity, of U.S. origin, 

and of equal or better quality than the 

donated food; or 

(2) Pay the distributing or recipient 

agency, as appropriate, for the 

replacement value of the donated food 

or commercial substitute. 

(g) Compensation for end products 

that are wholesome but not suitable for 

use. The processor must compensate the 

distributing or recipient agency, as 

appropriate, for donated foods, or for 

commercially purchased foods 

substituted for donated foods, contained 

in any end products that are wholesome 

but not suitable for use in the recipient 

agency’s food service. To make such 

compensation, the processor must 

return the end products to production 

for processing into end products that 

meet the required specifications (which 

are commonly called rework products). 

However, except under guaranteed 

return or standard yield, the processor 

may also make such compensation by 

paying the distributing or recipient 

agency, as appropriate, for the 

replacement value of the donated foods 

or commercial substitutes contained in 

the end products and retain such end 

products for its own use. 

(h) Credit for sale of by-products. The 

processor must credit the distributing or 

recipient agency, as appropriate, for the 

sale of any by-products produced in the 

processing of donated foods, except 

under guaranteed return or standard 

yield. The processor must credit for the 

net value of such sale, or the market 

value of the by-products, after 

subtraction of any documented 

expenses incurred in preparing the byproduct for sale. Crediting must be 

achieved through invoice reduction or 

by another means of crediting. 

(i) Labeling requirements. The 

processor must ensure that all end 

product labels meet Federal labeling 

requirements. If a processor claims that 

an end product contributes to 

fulfillment of meal pattern requirements 

in child nutrition programs, it must 

follow the procedures required for 

approval of labels for such end 

products. 

§ 250.34 Substitution of donated foods. 

(a) Substitution of commercially 

purchased foods for donated foods. 

Unless its agreement specifically 

stipulates that the donated foods must 

be used in processing, the processor 

may substitute commercially purchased 

foods for donated foods that are 

delivered to it from a USDA vendor. The 

commercially purchased food must be 

of the same generic identity, of U.S. 

origin, and of equal or better quality 

than the donated food. At the option of 

the processor, substitution may be made 

before the actual receipt of the donated 

food shipment. However, the 

Department may not be held liable if, 

due to changing market conditions or 

other reasons, the purchase of donated 

foods and their delivery to the processor 

is not feasible. Commercially purchased 

food substituted for donated food must 

meet the same processing yield 

requirements in § 250.33 that would be 

required for the donated food. 

(b) Prohibition against substitution 

and other requirements for backhauled 

donated foods. The processor may not 

substitute or commingle donated foods 

that are backhauled to it from a 

recipient agency’s storage facility. The 

processor must process backhauled 

donated foods into end products for sale 

and delivery to the recipient agency that 

provided them, and not to any other 

recipient agency. The processor may not 

provide payment for backhauled 

donated foods in lieu of processing. 

(c) Grading requirements. To assure 

that substitution requirements are met, 

the processing of donated beef, pork, 

and poultry must occur under Federal 

acceptance service grading, which is 

conducted by the Agricultural 

Marketing Service (AMS). Under 

Federal acceptance service grading, the 

grader verifies the quality and quantity 

of food that is put into production, and 

the quantity of end products produced. 

Federal acceptance service grading is 

not required for substitution of other 

donated foods, unless specifically 

requested by the Department or by the 

distributing agency. If the distributing 

agency determines that acceptance 

service grading is to be performed, it 

must consult with the applicable 

Federal agency in establishing specific 

grading requirements. The processor is 

responsible for paying the cost of 

acceptance service grading, whether 

required by regulations, or requested by 

the Department or the distributing 

agency. The processor must maintain 

grading certificates and other records 

necessary to document that substitution 

of all donated foods has been conducted 

in accordance with the requirements of 

this subpart. 

(d) Waiver of grading requirements. 

The distributing agency may waive the 

grading requirement for donated beef, 

pork, or poultry in accordance with one 

of the conditions listed in this 

paragraph (d). However, grading may 

only be waived on a case by case basis 

(i.e., for a particular production run); 

the distributing agency may not approve 

a blanket waiver of the requirement. 

Additionally, a waiver may only be 

granted if a processor’s past 

performance indicates that the quality of 

the end product will not be adversely 

affected. The conditions for granting a 

waiver include: 

(1) The processor has insufficient time 

to secure the services of a grader; 

(2) The cost of the grader’s service in 

relation to the value of donated beef, 

pork, or poultry being processed would 

be excessive; or 

(3) The distributing or recipient 

agency’s urgent need for the product 

leaves insufficient time to secure the 

services of a grader. 

(e) Use of substituted donated foods. 

The processor may use donated foods 

that have been substituted with 

commercially purchased foods in other 

processing activities conducted at its 

facilities. The processor may also sell 

substituted donated foods as an intact 

unit, but must remove all USDA labels 

(as applicable) before such sale. 

§ 250.35 Storage, inspection, quality 

control, and inventory management. 

(a) Storage and quality control. The 

processor must ensure the safe and 

effective storage of donated foods, 

including compliance with the general 

storage requirements in § 250.14(b), and 

must maintain an effective quality 

control system at its processing 

facilities. The processor must maintain 

documentation to verify the 

effectiveness of its quality control 

system, and must provide such 

documentation upon request. 

(b) Inspection requirements. The 

processor must ensure that all 

processing of donated beef, pork, and 

poultry, and of commercial meat 

products that contain any donated 

foods, is performed in plants under 

continuous Federal meat or poultry 

inspection. However, in States certified 

as having programs at least equal to 

Federal standards, processing of such 

foods may be performed in plants under 

continuous State meat or poultry 

inspection for processed end products 

that are utilized in the State, rather than 

the Federal inspection. Such 

inspections assure that plants maintain 

wholesomeness and sanitation 

requirements, and that labeling 

requirements are met. 

(c) Commingling of donated foods and 

commercially purchased foods. The 

processor may commingle donated 


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foods and commercially purchased 

foods, unless the processing agreement 

specifically requires separation of 

donated foods from commercially 

purchased foods, or the donated foods 

have been backhauled from a recipient 

agency. However, such commingling 

must be performed in a manner that 

ensures the safe and efficient use of 

donated foods, as well as compliance 

with substitution requirements in 

§ 250.34, and with reporting of donated 

food inventories on performance 

reports, as required in § 250.37. The 

processor must also ensure that 

commingling of processed end products 

and other food products by the 

distributor ensures the sale and delivery 

of end products that meet substitution 

requirements. 

(d) Limitations on donated food 

inventories. The processor may not 

maintain donated food inventories in 

excess of a six-month supply, based on 

an average amount of donated foods 

utilized for that period. However, the 

distributing agency may provide written 

approval to the processor to maintain a 

larger amount of donated foods in 

inventory if it determines that the 

processor may efficiently store and 

process such an amount. Unless such 

approval has been granted, the 

distributing agency may not order 

donated foods for delivery to a 

processor if it would result in excessive 

donated food inventories. 

(e) Excess donated food inventories. 

The distributing agency may permit the 

processor to carry over donated food 

inventories in excess of allowed levels 

into the next year of its agreement, if it 

determines that the processor may 

efficiently process such foods. The 

distributing agency may also direct the 

processor to transfer or redonate such 

donated foods to other distributing or 

recipient agencies or processors, in 

accordance with § 250.13. Redonation of 

donated foods may not be performed 

without FNS approval, in accordance 

with § 250.13(h). However, if these 

actions are not practical, the distributing 

agency must require the processor to 

pay it for the donated foods held in 

excess of allowed levels, at the 

replacement value of the donated foods. 

(f) Disposition of donated food 

inventories upon agreement 

termination. When an agreement 

terminates, and is not extended or 

renewed, the processor must take one of 

the actions indicated in this paragraph 

(f) with respect to remaining donated 

food inventories, as directed by the 

distributing agency. The processor must 

pay the cost of transporting any donated 

foods when the agreement is terminated 

at the processor’s request, or as a result 

of the processor’s failure to comply with 

the requirements of this part. The 

processor must: 

(1) Return the donated foods, or 

commercially purchased foods that meet 

the substitution requirements in 

§ 250.34, to the distributing or recipient 

agency, as appropriate; 

(2) Transfer or redonate the donated 

foods, or commercially purchased foods 

that meet the substitution requirements 

in § 250.34, to another distributing or 

recipient agency with which it has a 

processing agreement; or 

(3) Pay the distributing or recipient 

agency, as appropriate, for the donated 

foods, at the processing agreement value 

or replacement value of the donated 

foods, whichever is higher. 

§ 250.36 End product sales and crediting 

for the value of donated foods. 

(a) Methods of end product sales. To 

ensure that the distributing or recipient 

agency, as appropriate, receives credit 

for the value of donated foods contained 

in end products, the sale of end 

products must be performed using one 

of the systems of end product sales 

described in this section. All systems of 

sales utilized must provide clear 

documentation of crediting for the value 

of the donated foods contained in the 

end products. 

(b) Refund or rebate. Under this 

system, the processor sells end products 

to the distributing or recipient agency, 

as appropriate, at the commercial, or 

gross, price, and must provide a refund 

or rebate for the value of the donated 

food contained in the end products. The 

processor may also deliver end products 

to a commercial distributor for sale to 

distributing or recipient agencies under 

this system. In both cases, the processor 

must provide a refund to the 

appropriate agency within 30 days of 

receiving a request for a refund from 

that agency. The refund request must be 

in writing but may be by e-mail or other 

electronic submission. 

(c) Direct discount. Under this system, 

the processor must sell end products to 

the distributing or recipient agency, as 

appropriate, at a net price that provides 

a discount from the commercial case 

price for the value of donated food 

contained in the end products. 

(d) Indirect discount. Under this 

system, the processor delivers end 

products to a commercial distributor, 

which must sell the end products to an 

eligible distributing or recipient agency, 

as appropriate, at a net price that 

provides a discount from the 

commercial case price for the value of 

donated food contained in the end 

products. The processor must require 

the distributor to notify it of such sales, 

on a monthly basis, through automated 

sales reports or other electronic or 

written submission. The processor then 

compensates the distributor for the 

value of the discount provided to the 

distributing or recipient agency. 

(e) Fee-for-service. Under this system, 

the processor must sell end products to 

the distributing or recipient agency, as 

appropriate, at a fee-for-service, which 

includes all costs to produce the end 

products minus the value of the donated 

food used in production. The processor 

must identify any charge for delivery of 

end products separately from the feefor-service on its invoice. If the 

processor provides end products sold 

under fee-for-service to a distributor for 

delivery to the distributing or recipient 

agency, the processor must identify the 

distributor’s delivery charge separately 

from the fee-for-service on its invoice, or 

may permit the distributor to bill the 

appropriate agency separately for the 

delivery of end products. The processor 

may also provide written approval to 

the distributor to bill the distributing or 

recipient agency for the total case price 

(i.e., including the fee-for-service and 

the delivery charge), but must ensure 

that the distributor identifies the fee-forservice and delivery charge separately 

on the invoice. The processor must 

require the distributor to notify it of 

such sales in writing, on a monthly 

basis, through automated sales reports, 

e-mail, or other electronic submission. 

(f) Approved alternate method. The 

processor or distributor may sell end 

products under an alternate method 

approved by FNS and the distributing 

agency that ensures crediting for the 

value of donated foods. 

(g) Donated food value used in 

crediting. In crediting for donated foods 

in end product sales, the processing 

agreement value of the donated foods, as 

defined in § 250.3, must be used. 

(h) Ensuring sale and delivery of end 

products to eligible recipient agencies. 

In order to ensure the sale of end 

products to eligible recipient agencies, 

the distributing agency must provide the 

processor with a list of recipient 

agencies eligible to purchase end 

products, along with the quantity of raw 

donated food that is to be delivered to 

the processor for processing on behalf of 

each recipient agency. In order to ensure 

that the distributor sells end products 

only to eligible recipient agencies, the 

processor must provide the distributor 

with a list of eligible recipient agencies 

and the quantities of end products that 

they are eligible to receive. 


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50272 Federal Register / Vol. 71, No. 164 / Thursday, August 24, 2006 / Proposed Rules 

§ 250.37 Reports, records, and reviews of 

processor performance. 

(a) Performance reports. The 

processor must submit a performance 

report to the distributing agency on a 

monthly basis to describe its processing 

of donated foods. The report must 

include the information listed in this 

paragraph (a). Performance reports must 

be submitted not later than 30 days after 

the end of the reporting period; 

however, the final performance report 

must be submitted within 60 days of the 

end of the reporting period. The 

performance report must include the 

following information for the reporting 

period, with year-to-date totals: 

(1) The quantity of donated foods in 

inventory at the beginning of the 

reporting period; 

(2) The quantity of donated foods 

received; 

(3) The quantity of donated foods 

transferred to the processor from 

another entity, or transferred by the 

processor to another entity; 

(4) The quantity of end products 

delivered to each eligible recipient 

agency; 

(5) The quantity of donated foods 

remaining at the end of the reporting 

period; 

(6) Grading certificates, as applicable; 

and 

(7) Other supporting documentation, 

as required by the distributing agency. 

(b) Reporting reductions in donated 

food inventories. The processor may not 

report reductions in donated food 

inventories on performance reports until 

sales of end products have been made, 

or until sales of end products through 

distributors have been verified. When a 

distributor sells end products under a 

refund system, verification consists of 

the distributing or recipient agency’s 

request for a refund. When a distributor 

sells end products under indirect 

discount or fee-for-service, verification 

consists of the receipt of the 

distributor’s automated sales reports or 

other electronic or written reports 

submitted to the processor. 

(c) Summary performance report. 

Along with the submission of 

performance reports to the distributing 

agency, a multi-State processor must 

submit a summary performance report 

to FNS, on a monthly basis, in 

accordance with its National Processing 

Agreement. The summary report must 

include an accounting of the processor’s 

national inventory of donated foods, 

including the information listed in this 

paragraph (c). The report must be 

submitted not later than 30 days after 

the end of the reporting period; 

however, the final performance report 

must be submitted within 60 days of the 

end of the reporting period. The 

summary performance report must 

include the following information for 

the reporting period: 

(1) The total donated food inventory 

by State and the national total at the 

beginning of the reporting period; 

(2) The total quantity of donated food 

received by State, with year-to-date 

totals, and the national total of donated 

food received; 

(3) The total quantity of donated food 

reduced from inventory by State, with 

year-to-date totals, and the national total 

of donated foods reduced from 

inventory; and 

(4) The total quantity of donated foods 

remaining in inventory by State, and the 

national total, at the end of the reporting 

period. 

(d) Recordkeeping requirements for 

processors. The processor must 

maintain the following records relating 

to the processing of donated foods: 

(1) End product data schedules and 

summary end product data schedules, 

as applicable; 

(2) Receipt of donated food 

shipments; 

(3) Production, sale, and delivery of 

end products, including sales through 

distributors; 

(4) Remittance of refunds, invoices, or 

other records that assure crediting for 

donated foods in end products, and for 

sale of byproducts; 

(5) Documentation of Federal or State 

inspection of processing facilities, as 

appropriate, and of the maintenance of 

an effective quality control system; 

(6) Documentation of substitution of 

commercial foods for donated foods, 

including grading certificates, as 

applicable; 

(7) Waivers of grading requirements, 

as applicable; and 

(8) Required reports. 

(e) Recordkeeping requirements for 

the distributing agency. The distributing 

agency must maintain the following 

records relating to the processing of 

donated foods: 

(1) Processing agreements; 

(2) End product data schedules or 

summary end product data schedules, 

as applicable; 

(3) Performance reports; 

(4) Grading certificates, as applicable; 

(5) Documentation that supports 

information on the performance report, 

including sales of end products and 

crediting for donated foods, as required 

by the distributing agency; 

(6) Copies of audits of in-State 

processors and documentation of the 

correction of any deficiencies identified 

in such audits; 

(7) The receipt of end products, as 

applicable; and 

(8) Procurement documents, as 

applicable. 

(f) Recordkeeping requirements for the 

recipient agency. The recipient agency 

must maintain the following records 

relating to the processing of donated 

foods: 

(1) The receipt of end products 

purchased from processors or 

distributors; 

(2) Crediting for donated foods 

included in end products; 

(3) Recipient Processing Agreements, 

as applicable, and, in accordance with 

such agreements, other records included 

in paragraph (d) of this section, if not 

retained by the distributing agency; and 

(4) Procurement documents, as 

applicable. 

(g) Review requirements for the 

distributing agency. The distributing 

agency must review performance reports 

and its own records, as required in 

paragraph (e) of this section, and any 

other supporting documentation, to 

ensure that the processor: 

(1) Receives donated food shipments; 

(2) Delivers end products to eligible 

recipient agencies, in the types and 

quantities for which they are eligible; 

(3) Meets the required processing 

yields for donated foods under 

guaranteed minimum yield; and 

(4) Accurately reports donated food 

inventory activity, and maintains 

inventories within approved levels. 

§ 250.38 Provisions of agreements. 

(a) National Processing Agreement. A 

National Processing Agreement includes 

provisions to ensure that a multi-State 

processor complies with all of the 

applicable requirements in this part 

relating to the processing of donated 

foods. 

(b) Required provisions for State 

Participation Agreement. A State 

Participation Agreement with a multiState processor must include the 

following provisions: 

(1) Contact information for all 

appropriate parties to the agreement; 

(2) The effective dates of the 

agreement; 

(3) A list of recipient agencies eligible 

to receive end products; 

(4) Summary end product data 

schedules, with end products that may 

be sold in the State; 

(5) Assurance that the processor will 

not substitute or commingle backhauled 

donated foods, and will provide end 

products processed from such donated 

foods only to the recipient agency from 

which the foods were received; 

(6) Any applicable labeling 

requirements; 

(7) Other processing requirements 

implemented by the distributing agency, 


pwalker on PROD1PC68 with PROPOSALS4
Federal Register / Vol. 71, No. 164 / Thursday, August 24, 2006 / Proposed Rules 50273 

in accordance with the requirements in 

7 CFR Part 250, such as the specific 

method(s) of end product sales 

permitted; 

(8) A statement that the agreement 

may be terminated by either party upon 

30 days’ written notice; and 

(9) A statement that the agreement 

may be terminated immediately if the 

processor has not complied with its 

terms and conditions. 

(c) Required provisions for State 

Processing Agreement. A State 

Processing Agreement must include the 

following provisions or attachments: 

(1) Contact information for all 

appropriate parties to the agreement; 

(2) The effective dates of the 

agreement; 

(3) A list of recipient agencies eligible 

to receive end products, as applicable; 

(4) In the event that subcontracting is 

allowed, the specific activities that will 

be performed under subcontracts; 

(5) Assurance that the processor will 

provide a performance bond or 

irrevocable letter of credit to protect the 

value of donated foods it is expected to 

maintain in inventory, in accordance 

with § 250.32; 

(6) End product data schedules for all 

end products, with all required 

information, in accordance with 

§ 250.33; 

(7) Assurance that the processor will 

meet processing yields for donated 

foods, in accordance with § 250.33; 

(8) Assurance that the processor will 

compensate the distributing or recipient 

agency, as appropriate, for any loss of 

donated foods, in accordance with 

§ 250.33; 

(9) Any applicable labeling 

requirements; 

(10) Assurance that the processor will 

meet requirements for the substitution 

of commercially purchased foods for 

donated foods, including grading 

requirements, in accordance with 

§ 250.34; 

(11) Assurance that the processor will 

not substitute or commingle backhauled 

donated foods, and will provide end 

products processed from such donated 

foods only to the recipient agency from 

which the foods were received, as 

applicable; 

(12) Assurance that the processor will 

provide for the safe and effective storage 

of donated foods, meet inspection 

requirements, and maintain an effective 

quality control system at its processing 

facilities; 

(13) Assurance that the processor will 

report donated food inventory activity 

and maintain inventories within 

approved levels; 

(14) Assurance that the processor will 

return, transfer, or pay for, donated food 

inventories remaining upon termination 

of the agreement, in accordance with 

§ 250.35; 

(15) The specific method(s) of end 

product sales permitted, in accordance 

with § 250.36; 

(16) Assurance that the processor will 

credit recipient agencies for all donated 

foods, in accordance with § 250.36; 

(17) Assurance that the processor will 

submit performance reports and meet 

other reporting and recordkeeping 

requirements, in accordance with 

§ 250.37; 

(18) Assurance that the processor will 

obtain independent CPA audits, and 

will correct any deficiencies identified 

in such audits, in accordance with 

§ 250.18; 

(19) A statement that the distributing 

agency, subdistributing agency, or 

recipient agency, the Comptroller 

General, the Department of Agriculture, 

or their duly authorized representatives, 

may perform on-site reviews of the 

processor’s operation to ensure that all 

activities relating to donated foods are 

performed in accordance with the 

requirements in 7 CFR Part 250; 

(20) A statement that the agreement 

may be terminated by either party upon 

30 days’ written notice; 

(21) A statement that the agreement 

may be terminated immediately if the 

processor has not complied with its 

terms and conditions; and 

(22) A statement that extensions or 

renewals of the agreement, if applicable, 

are contingent upon the fulfillment of 

all agreement provisions. 

(d) Required provisions for Recipient 

Processing Agreement. The Recipient 

Processing Agreement must contain the 

same provisions as a State Processing 

Agreement, to the extent that the 

distributing agency permits the 

recipient agency to monitor compliance 

with the applicable processing 

requirements (e.g., approval of end 

product data schedules or review of 

performance reports). However, a list of 

recipient agencies eligible to receive end 

products need not be included. 

(e) Noncompliance with processing 

requirements. If the processor has not 

complied with processing requirements, 

the distributing or recipient agency, as 

appropriate, must not extend or renew 

the agreement, and may immediately 

terminate it. 

§ 250.39 Miscellaneous provisions. 

(a) Waiver of processing requirements. 

The Department may waive any of the 

requirements of this part for the purpose 

of conducting demonstration projects to 

determine if processing of donated 

foods may be performed more efficiently 

or effectively by other means. 

(b) Guidance or information. 

Guidance or information relating to the 

processing of donated foods is included 

on the FNS Web site at http:// 

www.fns.usda.gov/fdd, or may 

otherwise be obtained from FNS. Such 

guidance or information includes, for 

example, program regulations and 

policies, the processing handbook, the 

FNS Audit Guide, National Processing 

Agreement prototypes, and summary 

end product data schedule prototypes. 

Dated: August 11, 2006. 

Roberto Salazar, 

Administrator, Food and Nutrition Service. 

[FR Doc. 06–7073 Filed 8–23–06; 8:45 am] 

BILLING CODE 3410–30–P 


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