Revisions and Clarifications in Requirements for the Processing of Donated Foods, 1231-1252 [2016-31561]

Agencies

• DEPARTMENT OF AGRICULTURE
• Food and Nutrition Service

[Federal Register Volume 82, Number 3 (Thursday, January 5, 2017)]
[Proposed Rules]
[Pages 1231-1252]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31561]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / 
Proposed Rules

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DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 250

RIN 0584-AE38


Revisions and Clarifications in Requirements for the Processing 
of Donated Foods

AGENCY: Food and Nutrition Service (FNS), USDA.

ACTION: Proposed rule.

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SUMMARY: This rule proposes to revise and clarify requirements for the 
processing of donated foods in order to: Incorporate successful 
processing options tested in demonstration projects, ensure 
accountability for donated foods provided for processing, and increase 
program efficiency. The rule would require multi-State processors to 
enter into National Processing Agreements to process donated foods into 
end products, permit processors to substitute commercially purchased 
beef and pork of U.S. origin and of equal or better quality for donated 
beef and pork, and would increase oversight of inventories of donated 
foods at processors. The rule also revises regulatory provisions in 
plain language, to make them easier to read and understand.

DATES: To be assured of consideration, comments must be received on or 
before March 6, 2017.

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-AE38, by any of the following methods:
    Federal eRulemaking Portal: Go to https://www.regulations.gov. 
Follow the online instructions for submitting comments.
    Email: Send comments to ProcessingRuleComments@fns.usda.gov. 
Include RIN number 0584-AE38 in the subject line of the message.
    Mail: Send comments to Kiley Larson, Program Analyst, Policy 
Branch, Food Distribution Division, Food and Nutrition Service, U.S. 
Department of Agriculture, Room 500, 3101 Park Center Drive, 
Alexandria, Virginia 22302-1594.
    Hand Delivery or Courier: Deliver comments to the above address.

FOR FURTHER INFORMATION CONTACT: Kiley Larson or Erica Antonson at the 
above address or telephone (703) 305-2680.

SUPPLEMENTARY INFORMATION:

I. Background

    The Department of Agriculture (the Department or USDA) provides 
donated foods to State distributing agencies for distribution to 
recipient agencies (e.g., school food authorities) participating in the 
National School Lunch Program (NSLP) and 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 for use in NSLP 
or other food programs. For example, a whole chicken or chicken parts 
may be processed into precooked grilled chicken strips for use in NSLP. 
The ability to divert donated foods for processing provides recipient 
agencies with more options for using donated foods in their programs. 
The regulations ensure that State and recipient 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, the quantity and variety of donated foods 
provided in the NSLP and other child nutrition programs has increased 
substantially. Donated foods meet the highest quality and safety 
standards and are selected by the Department to assist recipient 
agencies in offering nutritious and well-balanced meals that meet meal 
pattern and nutrition standards for meals served in child nutrition 
programs. Concurrently, the variety of end products offered by 
processors has increased and adapted to reflect the types of foods 
recipient agencies need. 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.
    FNS has used its regulatory waiver authority in current 7 CFR 
250.30(q) to initiate demonstration projects designed to better serve 
recipient agencies and foster a more efficient program. These 
demonstration projects have proven very informative as the industry and 
the needs of recipient agencies have evolved. Many of these methods 
tested, such as the expansion of permitted substitutions and the 
implementation of National Processing Agreements, have proven 
successful and are proposed for codification in this rule.
    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 USDA-approved substitution plan. 
Substitution allows processors more flexibility and efficiency in 
producing finished end products for school food authorities which helps 
minimize cost while ensuring quality.
    In May 2013, FNS initiated a demonstration project which permitted 
processors with a USDA-approved substitution plan to substitute 
commercially purchased beef and pork for donated beef and pork, in 
accordance with the processor's USDA-approved substitution plan. In 
accordance with the terms of the demonstration project, as established 
in FNS policy memorandum FD-130: Processing--Substitution of USDA Beef 
and Pork, the commercial product must be of U.S. origin and of equal or 
better quality in all Departmental purchase specifications than the 
donated food.

[[Page 1232]]

Among other requirements of the demonstration project, the substitution 
plan has required assurances that: (1) Processing is performed in 
plants under continuous Federal or State meat inspection; (2) the 
Department's Agricultural Marketing Service (AMS) graders monitor the 
process to ensure compliance with substitution requirements; (3) 
commercial product is purchased from an AMS-approved vendor in good 
standing and is tested to ensure that it is of equal or better quality 
in all Departmental purchase specifications, including specifications 
relating to acceptable tolerance levels for specific microorganisms, 
chemical residues, and fat; and (4) commercial product is subject to 
audited processes for humane handling, food defense, and threat agent 
testing.
    In October 2004, FNS initiated a demonstration project to allow 
multi-State 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. Review and approval of 
end product data schedules, however, is a time and labor-intensive 
activity for State distributing agencies. National approval of end 
product data schedules under the demonstration project has reduced the 
time and labor burden considerably for both distributing agencies and 
all multi-State processors since processors are not required to submit 
end product data schedules for approval in each State in which they 
operate.
    In conjunction with the demonstration project allowing national 
approval of end product data schedules, FNS requires multi-State 
processors to sign a National Processing Agreement. 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. Under the demonstration project, the 
monitoring and protection of donated food inventories held by 
processors at the national level has further reduced the burden on 
distributing agencies. Distributing agencies may include other State-
specific processing requirements and select the processor's nationally 
approved end products for sale in the State under their State 
Participation Agreements with multi-State processors.
    On August 24, 2006, FNS published a proposed a rule to revise and 
clarify requirements for the processing of donated foods (71 FR 50249). 
As part of this proposed rule, FNS proposed to retain title to donated 
foods delivered to multi-State processors until acceptance of finished 
end products by the State distributing or recipient agency. It was 
subsequently determined that FNS needed additional statutory authority 
to retain title to donated foods at the processor and the rule was not 
finalized pending legislative change. Section 4104 of the Agricultural 
Act of 2014 (Pub. L. 113-79, the Farm Bill) amended Section 17 of the 
Commodity Distribution Reform Act and WIC Amendments of 1987, 7 U.S.C. 
612c note to provide that authority and the necessary statutory 
authority for FNS to promulgate regulations ensuring accountability of 
USDA Donated Foods.
    The regulatory amendments proposed in this rule would implement 
provisions of the Farm Bill related to processing of donated foods and 
incorporate into 7 CFR part 250 the processing options provided under 
the demonstration project described above. They would also more 
effectively ensure accountability for donated foods provided for 
processing while streamlining requirements to increase program 
efficiency for recipient agencies. Most significantly, the rule 
proposes to:
    (1) Require that FNS retain title of USDA Donated Foods while at 
multi-State processors;
    (2) Require each multi-State processor to sign a National 
Processing Agreement 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) Permit substitution of donated beef and pork with commercial 
beef and pork of U.S. origin and of equal or better quality in all 
Departmental purchase specifications than the donated food, provided 
applicable requirements are met, including a USDA-approved substitution 
plan;
    (5) Establish a title transfer exception dictating that when a 
recipient agency has contracted with a distributor to act as an 
authorized agent, title to finished end products containing donated 
foods transfers to the recipient agency upon delivery and acceptance by 
the contracted distributor;
    (6) Require processors providing end products containing donated 
foods to a distributor to enter into a written agreement with the 
distributor specifying the (a) distributor's financial liability for 
the replacement value of donated foods once delivered to the 
distributor; (b) frequency of reporting; and (c) applicable value pass 
through system; and
    (7) Require distributing agencies to more closely monitor donated 
food inventories at processors to ensure that processors do not 
maintain inventories in excess of what can be effectively utilized by 
recipient agencies in a timely manner.
    As discussed below, we propose to amend current Sec. Sec.  250.2, 
250.11, 250.18 and 250.19, and to completely revise Sec.  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 but not to 
change or alter the interpretation and application of the revised 
sections. The proposed changes to 7 CFR part 250 are discussed in 
detail below.

II. Discussion of the Rule's Provisions

A. Definitions, Sec.  250.2

    Due to developments in food distribution programs, and for the 
purpose of clarification, we propose to remove, revise, and add 
definitions in current Sec.  250.2 relating to processing of donated 
foods. We propose to remove the definitions of ``Contracting agency'' 
and ``Fee-for-service.'' 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 term ``Fee-for-
service'' is clear in the context of the proposed regulatory provisions 
and no longer requires a separate definition.
    We propose to add definitions of ``Backhauling,'' ``Commingling,'' 
``End product data schedule,'' ``In-State Processing Agreement,'' 
``National Processing Agreement,'' ``Recipient Agency Processing 
Agreement,'' ``Replacement value,'' and ``State Participation 
Agreement.'' The definition of ``Backhauling'' would describe a means 
of delivery of donated food to a processor from a recipient agency's 
storage facility. The definition of ``Commingling'' would describe the 
common storage of donated foods with commercially purchased foods. The 
definition of ``End product data schedule'' would convey the important 
function of this document in describing

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the processing of donated foods into finished end products. Definitions 
of ``National Processing Agreement,'' ``Recipient Agency Processing 
Agreement,'' ``State Participation Agreement,'' and ``In-State 
Processing Agreement'' would help the reader understand the different 
types of processing agreements permitted. These processing agreements 
are further described in the proposed Sec.  250.30. The definition of 
``Replacement value'' would clarify the donated food value that must be 
used by processors to ensure compensation for donated foods lost in 
processing or other activities. The definition of ``Replacement value'' 
reflects the price in the market at the time that the Department 
assigns the value whereas the definition of ``Contract value'' in 
current regulations reflects the Department's current acquisition 
price, which is set annually.

B. Delivery and Receipt of Donated Food Shipments, Sec.  250.11

    We propose to amend current Sec.  250.11(e), 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 or recipient agency upon its acceptance of the donated 
foods 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 amendments made by Section 4104 of the Farm Bill and the 
requirements under National Processing Agreements proposed in this 
rule. In the proposed Sec.  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 in the inventory 
of 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 in Sec.  250.11(e) 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.
    Many recipient agencies receiving finished end products from multi-
State processors contract with a distributor to store end products and/
or transport the finished end products to their facilities. The 
inclusion of distributors in the supply chain for finished end products 
creates challenges related to tracking and reporting the value of 
donated foods. Because processors are not a party to the contractual 
relationship between recipient agencies and distributors, processors 
lose control of finished end products once they are delivered to the 
distributors designated by each recipient agency. Therefore, we propose 
in this rulemaking that when a distributor is contracted by the 
recipient agency for the transportation and/or storage of finished end 
products and is acting as the recipient agency's authorized agent 
(i.e., purchasing processed end products containing donated foods on 
behalf of the recipient agency), title of donated foods would transfer 
to the recipient agency upon the acceptance of finished end products at 
the time and place of delivery at the recipient agency or the 
distributor acting as the authorized agent of the recipient agency, 
whichever happens first.
    Currently, in situations where recipient agencies contract with a 
distributor to store and/or transport processed end products containing 
donated foods and act as their authorized agent, complications can 
arise that may impede the transfer of title described above. Some 
processors and distributors, working in this manner, manufacture and/or 
order some processed end products prior to receiving donated food 
orders from recipient agencies. This results in processors and 
distributors ``pooling'' their inventories of processed end products, 
particularly for products containing nonsubstitutable items. In other 
words, processors will manufacture finished end products and 
distributors will order and receive processed end products from the 
processor without either entity knowing specifically which recipient 
agency will order or receive those items. This is most commonly due to 
processors and/or distributors manufacturing/ordering end products in 
advance of receiving orders from recipient agencies based on forecasted 
estimates. The diagram below illustrates the differences between 
``pooled'' and ``non-pooled'' inventory in these specific cases (i.e., 
nonsubstitutable donated food traveling through a supply chain that 
includes a distributor acting as the recipient agency's authorized 
agent).
    In the case of ``pooled'' inventories (as illustrated below), under 
current regulations title cannot transfer to the recipient agency at 
the time of delivery at their contracted distributor because neither 
the processor nor the distributor know which recipient agency will 
receive which products. The intent of the proposed Sec.  250.11(e) is 
to discourage the pooling of processed end products containing 
nonsubstitutable donated foods (i.e., end products must be assigned to 
a specific recipient agency by the time they are accepted at a 
distributor so that the title may be transferred to the correct 
recipient agency).
    Current Practice:

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[GRAPHIC] [TIFF OMITTED] TP05JA17.314

    This shift in the timing of title transfer would impact the 
calculation of performance bonds currently being required of multi-
State processors through National Processing Agreements. All other 
factors held equal, some multi-State processors would encounter a 
reduction in the required annual bond amount, as determined by FNS, due 
to the transfer of title of donated foods to the recipient agency 
taking place at an earlier stage in the supply chain. Although this 
shift would reduce inventories and bonding amounts for some multi-State 
processors, it would also place more responsibility on recipient 
agencies to track and protect the value of donated food inventories 
being managed by their designated distributors, acting as their agents.

C. Reporting Requirements, Sec.  250.18

    In current Sec.  250.18(b), processors are required to submit 
monthly performance reports to the distributing agency, in accordance 
with current Sec.  250.30(m). We propose to retain this requirement but 
to clarify that processors must submit performance reports and other 
supporting documentation, as required by the distributing agency or by 
FNS, in accordance with proposed Sec.  250.37.

D. Recordkeeping Requirements, Sec.  250.19

    In current Sec.  250.19(a), processors must maintain records 
documenting the sale of end products to recipient agencies, including 
the sale of such end products by distributors. As discussed later in 
the preamble, we are proposing to include specific recordkeeping 
requirements for processors in the

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proposed Sec.  250.37(d). Hence, we propose to amend this section to 
require that processors must comply with the applicable recordkeeping 
requirements in Subpart C of this part and with any other recordkeeping 
requirements included in their agreements.

E. 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 Sec.  250.30. In revising Subpart C, we would restructure 
it into 10 new sections, to more clearly present the specific 
processing requirements, and rewrite these sections in plain language. 
We propose to include the requirements for specific processing 
activities in the order in which they most commonly 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 Processing of donated foods into end products.
250.31 Procurement requirements.
250.32 Protection of donated food value.
250.33 Ensuring processing yields of donated foods.
250.34 Substitution of donated foods.
250.35 Storage, food safety, 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. Processing of Donated Foods Into End Products, Sec.  250.30
    In the proposed Sec.  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, In-State, and Recipient Agency Processing 
Agreements. However, we propose to include the specific provisions 
required for each type of agreement in the proposed Sec.  250.38, as 
the reason for their inclusion would only be clear with an 
understanding of the processing requirements contained in the preceding 
sections.
    In the proposed Sec.  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 Sec.  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. Currently, most donated 
foods are processed in accordance with National Processing Agreements 
or In-State Processing Agreements. However, some large school food 
authorities currently have agreements with processors to process 
donated foods and contracts to 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.
    In the proposed Sec.  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 proposed Sec.  250.30(b) the 
stipulation in current Sec.  250.30(c)(5)(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. We propose to 
clarify that the agreements described in this section are required in 
addition to, not in lieu of, competitively procured contracts required 
in accordance with Sec.  250.31. We propose to revise the requirement 
in current Sec.  250.30(c)(4) that indicates which official of the 
processor must sign the processing agreement and more simply state in 
proposed Sec.  250.30(b) that the processing agreement must be signed 
by an authorized individual acting for the processor. We propose to 
remove the stipulation in current Sec.  250.30(c)(1) that a processing 
agreement must be in standard written form.
    In accordance with the National Processing Agreement 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. Hence, in the proposed Sec.  250.30(c), we would 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, in 
the proposed Sec.  250.32, FNS holds and manages the multi-State 
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 in 
the proposed Sec.  250.30(d).
    In the proposed Sec.  250.30(d), we would 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 proposed Sec.  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. We propose to require the distributing agency to 
utilize selection criteria in current Sec.  250.30(c)(1) to select 
processors with which to enter into State Participation Agreements.
    Currently, a distributing agency must enter into an In-State 
Processing Agreement with an in-State processor (i.e., a processor 
which only services recipient agencies in a single State via a 
production facility located in the same

[[Page 1236]]

State) to process donated foods into finished end products for sale in 
the State. Under such an agreement, the distributing agency may procure 
the services and 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 processing agreements are commonly called ``master agreements.'' The 
distributing agency must utilize selection criteria in current Sec.  
250.30(c)(1) to select processors with which to enter into master 
agreements. Under all In-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 proposed Sec.  250.30(e), we propose to clarify the 
distinction between master agreements and other In-State Processing 
Agreements and to include in this proposed section the required 
criteria in current Sec.  250.30(c)(2) for selecting processors under 
master agreements. We propose to require that the distributing agency 
enter into an In-State Processing Agreement with an in-State processor 
to process donated foods, as currently required under the demonstration 
project.
    In current Sec.  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 
proposed Sec.  250.30(f), and to refer to them as Recipient Agency 
Processing Agreements. We also propose to clarify that, under such 
agreements, the distributing agency may also delegate oversight and 
monitoring to the recipient agency to approve end product data 
schedules or select nationally approved end product data schedules, 
review processor performance reports, manage the performance bond or 
letter of credit of an in-State processor, 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 Agency 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). We propose to require the recipient agency to 
utilize selection criteria in current Sec.  250.30(c)(1) to select 
processors with which to enter into Recipient Agency Processing 
Agreements. We propose to include the requirement in current Sec.  
250.30(l) that the distributing agency approve all Recipient Agency 
Processing Agreements. In general, FNS recommends that distributing 
agencies consult with the State administering agency for the review and 
approval of these agreements, if necessary. State administering 
agencies have experience reviewing and establishing processes to review 
contracts which are similar to Recipient Agency Processing Agreements.
    In current Sec.  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 
proposed Sec.  250.30(g), but to clarify that the requirements only 
apply to distributing agencies that procure end products on behalf of 
recipient agencies or otherwise limit recipient agencies' access to the 
procurement of specific end products. We also propose to clarify that 
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 Sec.  250.30(c)(5)(xv), 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. We propose to clarify, in the proposed Sec.  
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 written consent as part of 
its State Participation Agreement or In-State Processing Agreement with 
the processor.
    In the proposed Sec.  250.30(i), we would require agreements 
between processors and distributors. This proposal would provide 
distributing and recipient agencies with another tool to ensure that 
the value of donated foods and finished end products are properly 
credited and provided to recipient agencies when third party 
distributors exist in the supply chain between processors and recipient 
agencies. The agreement, initiated by the processor before releasing 
finished end products to a distributor, must reference, at a minimum, 
the financial liability (i.e., who must pay) for the replacement value 
of donated foods, not less than monthly end product sales reporting 
frequency, requirements under Sec.  250.11, and the applicable value 
pass through system to ensure that the value of donated foods and 
finished end products are properly credited to recipient agencies. 
Distributing agencies could set additional requirements such as 
requiring that copies or templates of these agreements be included with 
the submission of signed State Participation Agreements.
    In current Sec.  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 proposed Sec.  250.30(j), 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 (e.g., 
when new subcontractors are added), with the concurrence of the parties 
to the agreement, and that such amendments would be effective for the 
duration of the agreement, unless otherwise indicated.
    We propose to remove the following requirements or statements in 
current Sec.  250.30 related to processing agreements, as they are 
overly restrictive or unnecessary given current practice and 
administrative structure:
     The requirement in current Sec.  250.30(c)(1) that the FNS 
Regional Office review processing agreements.
     The requirement in current Sec.  250.30(c)(3) that the 
agreement be prepared and reviewed by State legal staff to ensure 
conformance with Federal regulations.

[[Page 1237]]

     The requirement in current Sec.  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 processors and the FNS Regional 
Office.
2. Procurement Requirements, Sec.  250.31
    The requirements for the procurement of goods and services under 
Federal grants are established in 2 CFR part 200 and USDA implementing 
regulations at 2 CFR part 400 and Part 416, as applicable. In the 
proposed Sec.  250.31(a), we propose to indicate the applicability of 
these requirements to the procurement of processed end products, 
distribution, or of other processing services related to donated foods. 
We also propose to indicate that distributing or recipient agencies may 
use procurement procedures that conform to applicable State and local 
laws, as appropriate, but must ensure compliance with the Federal 
procurement requirements.
    In the proposed Sec.  250.31(b), we would 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 would be 
utilized, an assurance that crediting for donated foods would be 
performed in accordance with the applicable requirements for such 
method of sales in proposed Sec.  250.36, the contract 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 Sec.  250.30(c)(5)(ii) that pricing 
information be included with the end product data schedule; and
    (2) The requirements in current Sec.  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, Sec.  250.32
    In current Sec.  250.30(c)(5)(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 proposed 
Sec.  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 little-used and unnecessarily 
complicates this section. 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 at least 75 percent of the value of 
donated foods in the processor's physical or book inventory, as 
determined annually, and at the discretion of FNS, for processors under 
National Processing Agreements. For multi-state processors in their 
first year of participation in the processing program, the amount of 
the performance bond or letter of credit must be sufficient to cover 
100 percent of the value of donated foods, as determined annually, and 
at the discretion of FNS. This proposed clarification would codify 
existing Program policy.
    In the proposed Sec.  250.32(b), we propose to indicate the 
conditions under which the distributing or recipient agency must call 
in the performance bond or letter of credit. We also propose to 
indicate that FNS would call in the performance bond or letter of 
credit under the same conditions and would ensure that any monies 
recovered by FNS are reimbursed to distributing agencies for losses of 
entitlement foods.
4. Ensuring Processing Yields of Donated Foods, Sec.  250.33
    In current Sec.  250.30(c)(5), 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, 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 for the donated food;
     The contract value of the donated food; and
     Any pricing information in addition to the charge for the 
end product or fee-for-service.
    In the proposed Sec.  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. In the proposed Sec.  250.33(a), we 
would 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, in the proposed Sec.  250.31, 
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 a competitive 
procurement has been performed by the distributing agency under its In-
State Processing Agreement or State Participation Agreement. Prices 
currently included on end product data schedules generally reflect the 
highest price that a processor would charge for the finished end 
product and not necessarily the actual price of the 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., pounds 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 In-State 
Processing Agreements. We propose to clarify that the end product data 
schedules for products containing donated red meat or poultry must also 
be approved by the Department, as is currently required under the 
demonstration project. 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 in a standard electronic format dictated by 
FNS, 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 proposed Sec.  250.33(b), we propose to describe the different 
processing yields of donated foods that may be approved in end product 
data schedules. In current Sec.  250.30(c)(5)(ii), the processor must 
meet a 100 percent yield in the processing of all

[[Page 1238]]

substitutable donated foods (i.e., generally all donated foods except 
beef, pork and poultry). Under 100 percent yield, the processor must 
ensure that 100 percent of the raw donated food diverted for processing 
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. These reductions must be reported 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 proposed Sec.  250.33(b)(1). We 
propose to indicate that FNS may make exceptions to the 100 percent 
yield requirement, on a case-by-case basis. Exceptions to the 100 
percent yield requirement can result in one of the alternate processing 
yields described below.
    Processing of donated foods such as beef, pork, and poultry 
invariably results in significant loss of product, such as the bones in 
chicken or fat in beef and pork. 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. In an effort to simplify the yield requirements and 
streamline monitoring for distributing and recipient agencies we 
propose to limit the processing yields to 100 percent yield, guaranteed 
yield, and standard yield.
    Under guaranteed yield, the processor must ensure that a specific 
quantity of end product would be produced from a specific quantity of 
donated food put into production. The guaranteed yield for a specific 
product is determined and agreed upon by the parties to the processing 
agreement, and, for In-State and Recipient Agency Processing 
Agreements, approved by the Department. Guaranteed yield is generally 
used when significant variance is present across processors in 
manufacturing and yield for a particular end product. The guaranteed 
yield must be indicated on the end product data schedule. We propose to 
describe guaranteed yield in the proposed Sec.  250.33(b)(2).
    Under standard yield, the processor must ensure that a specific 
quantity of end product, as determined by the Department, would be 
produced from a specific quantity of donated food. The standard yield 
is determined and applied uniformly by the Department to all processors 
for specific donated foods. 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. If necessary, the processor must use commercially 
purchased food of the same generic identity, of U.S. origin, and equal 
or better in all USDA procurement specifications than the donated food 
to provide the number of cases required to meet the standard yield to 
the distributing or recipient agency, as appropriate. Like guaranteed 
yield, standard yield ensures that the recipient agency would receive a 
specific quantity of end product, which helps to ensure that it can 
meet its food service needs. We propose to describe standard yield in 
the proposed Sec.  250.33(b)(3).
    In the proposed Sec.  250.33(c), we would 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. 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. 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. 
Loss of donated foods may result for a number of reasons, including the 
processor's failure to meet the required processing yield or failure to 
produce end products that meet required specifications, as described 
above, spoilage or damage of donated foods in storage, or improper 
distribution of end products. In order to compensate for such losses of 
donated 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 equal or better in all USDA procurement specifications than 
the donated food; or
    (2) Return end products that are wholesome but do not meet required 
specifications to production for processing into the requisite quantity 
of end products that meet the required specifications; or
    (3) Pay the distributing or recipient agency, as appropriate, for 
the replacement value of the donated food or commercial substitute only 
if the purchase of replacement foods is not feasible and the processor 
has received approval. In-State processors would be required to obtain 
distributing agency approval for such payment and multi-State 
processors would be required to obtain FNS approval.
    In current Sec.  250.30(c)(5)(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. We propose to include this requirement in the proposed Sec.  
250.33(d), 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 by-product for sale. We propose to 
remove the requirement in current Sec.  250.30(c)(5)(viii)(D) that the 
processor credit the distributing or recipient agency for the sale of 
donated food containers because the burden required to monitor the 
credit outweighed the value returned.
    In current Sec.  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 proposed Sec.  250.33(e).
5. Substitution of Donated Foods, Sec.  250.34
    We propose to include requirements for the substitution of donated 
foods in the proposed Sec.  250.34. Currently, in Sec.  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. 
Under current regulations, substitution of donated poultry is permitted 
with some limitations in accordance with a processor's USDA-approved 
substitution plan. Substitution of

[[Page 1239]]

donated beef and pork is not permitted under the current regulations.
    As previously discussed in the preamble, beginning in 2013, the 
Department used its regulatory waiver authority, to permit processors 
with a Department-approved Processor Control Certification Program plan 
to substitute commercially purchased beef and pork for donated beef and 
pork. The commercial product must be of U.S. origin, and of equal or 
better quality in all Departmental purchase specifications than the 
donated food. In addition, only donated 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 Sec.  250.30(f)(1)(ii).
    In the proposed Sec.  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 in all Departmental 
purchase specifications than the donated food. We propose to clarify 
that commercially purchased beef, pork or poultry must meet the same 
specifications as donated product, including inspection, grading, 
testing, and humane handling standards, and must be approved by the 
Department in advance of substitution. Hence, we propose to remove the 
required elements of a processor's plan for poultry substitution in 
current Sec.  250.30(f)(1)(ii)(B).
    In current Sec.  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 if, due to changing market conditions or 
other reasons, the Department is unable to purchase and deliver donated 
poultry to the processor for processing. In the proposed Sec.  
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 in the 
proposed Sec.  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. In 
the proposed Sec.  250.34(b), we propose to prohibit substitution or 
commingling of all backhauled donated foods and to require that the 
processor, if amenable to reformulation, process such end products into 
end products for sale and delivery to the same recipient agency that 
provided them and not to any other recipient agency. In other words, 
the recipient agency which backhauls a previously processed end product 
to a processor for reformulation must in turn use the reformulated end 
products, containing their backhauled product, in their food service. 
Additionally, we propose to prohibit the processor from providing 
payment to the recipient agency in lieu of processing and prohibit the 
distributing or recipient agency from transferring the backhauled food 
to another processor.
    In current Sec.  250.30(g), the processing of donated beef, pork 
and poultry must occur under Federal acceptance service grading in 
order to assure that substitution and yield requirements are met and 
that end products conform with the applicable end product data 
schedule. Such grading is conducted by the Department's Agricultural 
Marketing Service. 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 grading certificate. The 
processor is responsible for paying the cost of the acceptance service 
grading. In current Sec.  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 proposed Sec.  250.34(c).
    In current Sec.  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 proposed Sec.  250.34(d). However, we 
propose to indicate that such waivers may only be approved on a case by 
case basis--e.g., 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 would not be adversely affected.
    Also, in current Sec.  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. 
Additionally, in current Sec.  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 proposed Sec.  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 
propose to remove the stipulation, in current Sec.  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 Sec.  
250.30(f)(1)(iii) 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 in the proposed Sec.  
250.33(f), is more appropriate, and effective, than a requirement that 
the processor make specific purchases of foods in the commercial 
market.
6. Storage, Food Safety, Quality Control, and Inventory Management, 
Sec.  250.35
    We propose to include requirements for the storage, food safety 
oversight, quality control, and inventory management of donated foods 
provided for processing in the proposed Sec.  250.35. In current Sec.  
250.30(c)(5)(x), the

[[Page 1240]]

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 proposed Sec.  250.35(a), we would require the 
processor to ensure the safe and effective storage of donated foods, 
including compliance with the general storage requirements in current 
Sec.  250.12, 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 Sec.  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. We propose to simplify these regulations in the 
proposed Sec.  250.35(b) by requiring that all processing of donated 
foods is conducted in compliance with all Federal, State, and local 
requirements relative to food safety.
    In the proposed Sec.  250.35(c), we propose to clarify that a 
processor may commingle donated foods and commercially purchased foods, 
unless the processing agreement specifically stipulates that the 
donated foods must be used in processing, and not substituted, 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 that processors ensure that commingling 
of finished end products with other food products by distributors 
results in the sale to recipient agencies of end products that meet 
substitution requirements. One way that this may be achieved is by 
affixing the applicable USDA certification stamp to the exterior 
shipping containers of such end products. This incorporates the 
provision in current Sec.  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 Sec.  
250.30(i) that exterior shipping containers or product labels for end 
products containing nonsubstitutable donated foods 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 Sec.  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, at the processor's request, provide 
written approval to allow 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. The distributing agency 
may 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 inventories of donated 
foods at a processor in the proposed Sec.  250.35(d) and to clarify 
that distributing agencies are not permitted to submit food orders for 
processors reporting no sales activity during the prior year's contract 
period unless documentation is submitted by the processor which 
outlines specific plans for donated food drawdown, product promotion, 
or sales expansion. Many distributing agencies have adopted ``sweep'' 
policies in which they transfer excess processor inventories for one 
recipient agency to another recipient agency or processor which is 
willing to accept it, to ensure that inventory is used effectively. For 
example, a distributing agency may transfer a recipient agency's 
remaining inventory at a processor to another recipient agency that is 
willing to accept such foods and use the foods efficiently. Such 
policies provide an additional tool for distributing agencies to ensure 
that donated foods are used efficiently and that processors and 
recipient agencies effectively manage their donated food inventories. 
We propose to include an allowance for FNS to require an inventory 
transfer to another State distributing agency or processor when 
inventories are determined to be excessive for a State distributing 
agency or processor, i.e., more than six months on-hand or exceeding 
the established inventory protection, to ensure full utilization prior 
to the end of the school year.
    In current Sec.  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 Sec.  250.12(e), to transfer 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 
proposed Sec.  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 the 
distributing agency 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 re-
donate 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 for the donated foods held in excess of allowed levels in an amount 
equal to the replacement value of the donated foods.
    In current Sec.  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 as applicable 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 proposed 
Sec.  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 
proposed Sec.  250.34 to permit substitution of all donated foods. We 
propose to clarify that the disposition of donated foods may include a 
transfer; i.e., the distributing agency may permit a transfer of 
donated foods to another State distributing agency, with FNS approval, 
in

[[Page 1241]]

accordance with current Sec.  250.12(e). We also propose to permit the 
transfer of commercially purchased foods that meet the substitution 
requirements in the proposed Sec.  250.34 in place of the donated 
foods. We propose to permit the processor to pay the distributing or 
recipient agency, as appropriate, for the donated foods only if 
returning or transferring the donated foods or commercially purchasing 
food that meets the substitution requirements is not feasible and if 
FNS approval has been granted. If the distributing agency requires the 
processor to pay for donated foods, we propose to require such payment 
at the contract 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 Sec.  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 Sec.  
250.17(c). The allowable use of funds accruing from program operations, 
including funds received by distributing agencies from payments for 
donated foods upon termination of an agreement, is described in current 
Sec.  250.17 and thus the stipulation is no longer necessary.
7. End Product Sales and Crediting for the Value of Donated Foods, 
Sec.  250.36
    In current Sec.  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 Sec.  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 proposed Sec.  250.36(a), we would 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 Sec.  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 Sec.  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 proposed Sec.  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 transmitted via email 
or other electronic means. We propose to remove the requirement in 
current Sec.  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. The agency may 
determine how frequently it wishes to receive its refunds, but refunds 
must be issued more frequently than annually. To that end, we also 
propose to remove the option, in current Sec.  250.30(k)(3), for the 
processor to submit refunds that total $25 or less on a quarterly 
basis.
    In current Sec.  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 proposed Sec.  
250.36(c). We propose to refer to this system as a direct discount 
system to distinguish it from the method of end product sales described 
in the following paragraph.
    In current Sec.  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 discount provided 
for the value of the donated food in its sale of end products. We 
propose to permit end product sales under this system in the proposed 
Sec.  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, at least on a monthly basis, through automated sales 
reports or other submission. We propose to remove the requirement, in 
current Sec.  250.30(k)(2), that the distributor apply to the processor 
for a refund under this system.
    In current Sec.  250.30(d)(2), and in accordance with the 
definition in current Sec.  250.2, 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 proposed Sec.  250.36(e).
    In current Sec.  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 distributing or 
recipient agency-contracted distributor to bill the distributing or 
recipient agency, as appropriate, for the total case price--i.e., for 
the fee-for-service and the delivery charge. In such cases, the 
processor must ensure that the appropriate agency has advance 
notification of the fee-for-service and delivery charge. The processor 
must require that the distributor notify it of such sales, at least on 
a monthly basis, through automated sales reports or other submission, 
which may include email or other electronic means. We propose to 
include these requirements in the proposed Sec.  250.36(e).
    In current Sec.  250.30(d)(1)(iii), the processor may sell end 
products to the distributing or recipient agency under an alternate 
method of end product

[[Page 1242]]

sales that is approved by FNS and the distributing agency. In current 
Sec.  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 proposed Sec.  250.36(f).
    In the proposed Sec.  250.36(g), we propose to clarify that the 
contract value of the donated foods must be used in crediting for 
donated foods in end product sales and to refer to the definition of 
contract value included in current Sec.  250.2. In the proposed Sec.  
250.36(h), we would 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 either the quantities of approved end products that each 
recipient agency is eligible to receive, or the quantity of donated 
food allocated to each recipient agency along with the raw donated food 
(pounds or cases) needed per case of each approved end product.
8. Reports, Records, and Reviews of Processor Performance, Sec.  250.37
    In the proposed Sec.  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 Sec.  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 receiving end 
products;
    (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 proposed Sec.  250.37(a), we propose to retain the 
requirement that the processor submit the performance report to the 
distributing agency (or to the recipient agency, in accordance with a 
Recipient Agency Processing Agreement) on a monthly basis. We propose 
to retain all of the currently required information in the report. We 
propose to require the processor to include quantities of donated food 
losses. 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. We propose to retain the current 
deadlines for the submission of performance reports in the proposed 
Sec.  250.37(a).
    In the proposed Sec.  250.37(b), we would require that the 
processor must include reductions in donated food inventories on 
monthly performance reports only after sales of end products have been 
made, or after sales of end products through distributors have been 
documented. We propose to require that, when a distributor sells end 
products under a refund system, such documentation must be through the 
distributing or recipient agency's request for a refund (under a refund 
system) or through the distributor's automated sales reports or other 
electronic or written submission (under an indirect discount system or 
under fee-for-service).
    In the proposed Sec.  250.37(c), we would require that a multi-
State processor submit a summary performance report to FNS, on a 
monthly basis and in a standard format established by FNS, containing 
information from the performance report that would allow FNS to track 
the processor's total and State-by-State donated food inventories. The 
purpose of this report is to assess 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 proposed Sec.  250.37(a).
    In the proposed Sec.  250.37(d), we would 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 Sec.  250.19(a), accurate and complete 
records must be maintained with respect to end products processed from 
donated foods. In the proposed Sec.  250.37(e), we would 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 proposed Sec.  250.37(f), we would require that recipient 
agencies 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 the value of donated foods included in end products, and 
procurement documents.
    In accordance with current Sec.  250.18(b), 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 Sec.  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 proposed Sec.  
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; and
    (4) Accurately reports donated food inventory activity and 
maintains inventories within approved levels.
    We propose to remove the requirements in current Sec.  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. Donated 
nonfat dry milk

[[Page 1243]]

is no longer available for donation to schools.
9. Provisions of Agreements, Sec.  250.38
    In the proposed Sec.  250.38, we include the required provisions 
for each type of processing agreement included in the proposed Sec.  
250.30, to ensure compliance with the requirements in 7 CFR part 250. 
In the proposed Sec.  250.38(a), we propose to establish that the 
National Processing Agreement is inclusive of all provisions necessary 
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 proposed Sec.  250.38(b), we would 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, a requirement that processors enter into a 
written agreement with distributors handling end products containing 
donated foods, and the allowed method(s) of end product sales 
implemented by the distributing agency.
    In the proposed Sec.  250.38(c), we would require that the In-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 Sec.  250.30(c)(5) 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, 
enter into a written agreement with distributors handling end products 
containing donated foods, credit recipient agencies for the value of 
all donated foods contained in end products, and obtain required 
audits.
    In accordance with the proposed Sec.  250.38(d), we propose to 
require that the Recipient Agency Processing Agreement contain the same 
provisions as an In-State Processing Agreement, to the extent that the 
distributing agency permits the recipient to perform activities 
normally performed by the distributing agency under an In-State 
Processing Agreement (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 proposed Sec.  250.38(e), we propose to prohibit a 
distributing or recipient agency, as appropriate, from extending or 
renewing an agreement when a processor has not complied with processing 
requirements. We propose to allow a distributing or recipient agency to 
immediately terminate an agreement in the event of such noncompliance.
10. Miscellaneous Provisions, Sec.  250.39
    In current Sec.  250.30(q), FNS may waive any of the requirements 
in 7 CFR part 250 for the purpose of conducting demonstration projects 
to test program changes which might improve processing of donated 
foods. We propose to include this provision with minimal change in the 
proposed Sec.  250.39(a).
    In the proposed Sec.  250.39(b), we propose to retain the 
requirement in current Sec.  250.30(p) that the distributing agency 
develop and provide a processing manual or similar materials to 
processors and other parties to ensure sufficient guidance is given to 
processors and other parties to permit compliance with requirements for 
the processing of donated foods. Consistent with the current 
demonstration project, the distributing agency would be permitted to 
provide additional information relating to State-specific processing 
procedures upon request.
    In the proposed Sec.  250.39(c), we propose to clarify that 
guidance or information relating to the processing of donated foods is 
included on the FNS Web site or may otherwise be obtained from FNS. 
Such guidance and information includes program regulations and 
policies, the FNS Audit Guide, and the USDA National Processing 
Agreement.

III. Procedural Matters

A. Executive Order 12866 and 13563

    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility.
    This proposed rule has been determined to be not significant and 
was not reviewed by the Office of Management and Budget (OMB) in 
conformance with Executive Order 12866.

B. Regulatory Impact Analysis

    This rule has been designated as not significant by the Office of 
Management and Budget, therefore, no Regulatory Impact Analysis is 
required.

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601-612) requires Agencies 
to analyze the impact of rulemaking on small entities and consider 
alternatives that would minimize any significant impacts on a 
substantial number of small entities. Pursuant to that review, the 
Administrator of FNS has certified that this rule would not have a 
significant impact on a substantial number of small entities.

D. Unfunded Mandates Reform Act

    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, the 
Department generally must prepare a written statement, including a cost 
benefit analysis, for proposed and final rules with ``Federal 
mandates'' that may result in expenditures by State, local or Tribal 
governments, in the aggregate, or the private sector, of $146 million 
or more (when adjusted for inflation; GDP deflator source: Table 1.1.9 
at https://www.bea.gov/iTable) in any one year. When such a statement is 
needed for a rule, Section 205 of the UMRA generally requires the 
Department to identify and consider a reasonable number of regulatory 
alternatives and adopt the most cost effective or least burdensome 
alternative that achieves the objectives of the rule.
    This proposed rule does not contain Federal mandates (under the 
regulatory provisions of Title II of the UMRA) for State, local, and 
Tribal governments or the private sector of $146 million or more in any 
one year. Thus, the rule is 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 10.555, 10.558, 10.559, 10.565, 10.567, and 10.569 is subject to 
Executive Order 12372, which requires intergovernmental consultation 
with State and local officials. (See 2 CFR chapter IV)

[[Page 1244]]

F. Federalism Summary Impact Statement

    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 13121.
    The Department has considered the impact of this rule on State and 
local governments and has determined that this rule does not have 
federalism implications. Therefore, under section 6(b) of the Executive 
Order, a federalism summary is not required.

G. Civil Rights Impact Analysis

    FNS has reviewed this proposed rule in accordance with USDA 
Regulation 4300-4, ``Civil Rights Impact Analysis,'' to identify any 
major civil rights impacts the rule might have on program participants 
on the basis of age, race, color, national origin, sex or disability. 
After a careful review of the rule's intent and provisions, FNS has 
determined that this rule would not in any way limit or reduce the 
ability of participants to receive the benefits of donated foods in 
food distribution or child nutrition programs 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.

H. Executive Order 13175

    Executive Order 13175 requires Federal agencies to consult and 
coordinate with Tribes on a government-to-government basis on policies 
that have Tribal implications, including regulations, legislative 
comments or proposed legislation, and other policy statements or 
actions that have substantial direct effects on one or more Indian 
Tribes, on the relationship between the Federal Government and Indian 
Tribes, or on the distribution of power and responsibilities between 
the Federal Government and Indian Tribes. FNS consulted with Tribes on 
this proposed rule on November 19, 2014, however no concerns or 
comments were received. We are unaware of any current Tribal laws that 
could be in conflict with the final rule.

I. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995, this notice 
invites the general public and other public agencies to comment on this 
proposed information collection. This collection is a revision of a 
currently approved collection, OMB#0584-0293.
    Written comments must be received on or before March 6, 2017. 
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 shall 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 that were used; (c) ways to enhance the 
quality, utility, and clarity of the information to be collected; and 
(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.
    Comments will be accepted through the Federal eRulemaking Portal. 
Go to https://www.regulations.gov, and follow the online instructions 
for submitting comments electronically. Comments may also be sent to 
Kiley Larson, 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 proposed 
rule.
    Title: Food Distribution Forms.
    OMB Number: 0584-0293.
    Expiration Date: 11/30/2016.
    Type of Request: Revision of a currently approved collection.
    Abstract: This is a revision of an existing information collection 
based on this proposed rule, Revisions and Clarifications in 
Requirements for the Processing of Donated Foods. The rule proposes to 
add reporting requirements to the existing information collection 
associated with 7 CFR part 250, OMB Number 0584-0293 as follows:
New Reporting Requirements Associated With This Rulemaking
     Sec.  250.37(c), Summary Performance Report. Multi-State 
processors submit a summary performance report to FNS. The summary 
performance report lists the complete donated food inventory at the 
beginning and end of the reporting month and the total donated food 
inventory by State and the national total. Approximately 110 
respondents are expected to submit 12 summary performance reports per 
year. Each performance report is expected to take 1 hour to complete, 
for a total annual burden of 1320.00 hours.
     Sec.  250.30(i), Agreements between Processors and 
Distributors. A processor providing end products containing donated 
foods to a distributor must enter into a written agreement with the 
distributor. The agreement must include the financial liability for the 
replacement value of donated foods, monthly end product sales reporting 
frequency, requirements under 250.11, and the applicable value pass 
through system. These agreements can be considered permanent, with 
amendments made as necessary. We estimate that 225 respondents will 
enter into an agreement in the first year and 5 will amend their 
agreements each year for the next 2 years, with 2.0 hours per response. 
The estimated annual reporting burden for this activity is 156.66 
hours.
     Sec.  250.33(a), End Product Data Schedules. Processors 
must submit end product data schedules, in a standard electronic form 
dictated by FNS for approval by FNS (for National Processing 
Agreements) or by the State distributing agency (for In-State 
Processing Agreements) for each new product that a processor wishes to 
provide or for a previously approved end product in which the 
ingredients have been altered. All products containing donated red meat 
and poultry must have their end product data schedules approved by 
USDA. The end product data schedule must include a description of the 
end product, the donated foods and other ingredients included in the 
end product, the quantity of the end product produced, and the 
processing yield of the donated food. We expect 131 processors to 
provide end product data schedules to FNS or the State distributing 
agency 12 times a year. The estimated time for each response is 0.5 
hours, for a total of 786 burden hours.
    In addition to the above reporting requirements, FNS has reviewed 
the information collection associated with 7 CFR part 250 and 
determined that several reporting and recordkeeping requirements 
require update due to changes in historical averages and/or duplicate 
counting. Those adjustments result in a net burden reduction of 5,177 
hours. The table below summarizes the changes to the burden for OMB 
Number 0584-0293. For additional details, see the information 
collection material included in the docket to this rule.

[[Page 1245]]



--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                  Number of                          Estimated total
                     Affected public                        Estimated number    responses per       Total annual        hours per       Estimated total
                                                             of respondents       respondent         responses           response            burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Reporting
--------------------------------------------------------------------------------------------------------------------------------------------------------
State, Local, and Tribal Governments.....................             20,866              11.13         232,319.24               0.25          58,679.50
Private For Profit.......................................              2,812             306.43         861,681.33               0.03          26,093.88
Private Not for Profit...................................              1,600               2.03           3,240.00               0.19             614.50
Individual...............................................         611,200.00               1.96       1,199,200.00               0.25         304,400.00
                                                          ----------------------------------------------------------------------------------------------
    Total Estimated Reporting Burden.....................         636,478.00               3.61       2,296,440.57               0.17         389,787.88
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Recordkeeping
--------------------------------------------------------------------------------------------------------------------------------------------------------
State, Local, and Tribal Governments.....................          20,866.00              22.58         471,130.46               0.08          35,413.02
Private For Profit.......................................              2,812             367.86       1,034,429.00               0.06          62,671.72
Private Not for Profit...................................              1,600               7.99          12,782.00              52.63         672,662.29
Individual...............................................                  0               0.00               0.00               0.00               0.00
                                                          ----------------------------------------------------------------------------------------------
    Total Estimated Recordkeeping Burden.................          25,278.00              60.07       1,518,341.46               0.51         770,747.03
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                          Total of Reporting and Recordkeeping
--------------------------------------------------------------------------------------------------------------------------------------------------------
Reporting................................................         636,478.00               3.61       2,296,440.57               0.17         389,787.88
Recordkeeping............................................          25,278.00              60.07       1,518,341.46               0.51         770,747.03
                                                          ----------------------------------------------------------------------------------------------
    Total................................................         636,478.00               5.99       3,814,782.03               0.30       1,160,534.91
--------------------------------------------------------------------------------------------------------------------------------------------------------

J. E-Government Act Compliance

    The Department 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.

List of Subjects in 7 CFR Part 250

    Administrative practice and procedure, Food assistance programs, 
Grant programs, Social programs, 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 
TERRITIORIES AND POSSESSIONS AND AREAS UNDER ITS JURISDICTION

0
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.

0
2. In Sec.  250.2:
0
a. Remove definitions of Contracting agency and Fee-for-service.
0
b. Add definitions in alphabetical order for Backhauling, Commingling, 
End product data schedule, In-State Processing Agreement, National 
Processing Agreement, Recipient Agency Processing Agreement, 
Replacement value, and State Participation Agreement.
    The revisions and additions read as follows:


Sec.  250.2  Definitions.

* * * * *
    Backhauling means the delivery of donated foods to a processor for 
processing from a distributing or recipient agency's storage facility.
* * * * *
    Commingling means the storage of donated foods together with 
commercially purchased foods.
* * * * *
    End product data schedule means a processor's description of its 
processing of donated food into a finished end product, including the 
processing yield of donated food.
* * * * *
    In-State Processing Agreement means a distributing agency's 
agreement with an in-State processor to process donated foods into 
finished end products for sale to eligible recipient agencies or for 
sale to the distributing agency.
* * * * *
    National Processing Agreement means an agreement between FNS and a 
multi-State processor to process donated foods into end products for 
sale to distributing or recipient agencies.
* * * * *
    Recipient Agency Processing Agreement means a recipient agency's 
agreement with a processor to process donated foods and to purchase the 
finished end products.
* * * * *
    Replacement value means the price assigned by the Department to a 
donated food which must reflect the current price in the market to 
ensure compensation for donated foods lost in processing or other 
activities. The replacement value may be changed by the Department at 
any time.
* * * * *
    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.
* * * * *
0
3. In Sec.  250.11, revise paragraph (e) to read as follows:


Sec.  250.11  Delivery and receipt of donated food shipments.

* * * * *
    (e) Transfer of title. In general, 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. 
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

[[Page 1246]]

place of delivery. However, when a recipient agency has contracted with 
a distributor to act as an authorized agent, title to finished end 
products containing donated foods transfers to the recipient agency 
upon delivery and acceptance by the contracted distributor. 
Notwithstanding transfer of title, distributing and recipient agencies 
must ensure compliance with the requirements of this part in the 
distribution, control, and use of donated foods.
* * * * *
0
4. In Sec.  250.18, revise paragraph (b) to read as follows:


Sec.  250.18  Reporting requirements.

* * * * *
    (b) Processor performance. Processors must submit performance 
reports and other supporting documentation, as required by the 
distributing agency or by FNS, in accordance with Sec.  250.37(a), to 
ensure compliance with requirements in this part.
* * * * *
0
5. In Sec.  250.19, revise paragraph (a) to read as follows:


Sec.  250.19  Recordkeeping requirements.

    (a) Required records. Distributing agencies, recipient agencies, 
processors, and other entities must maintain records of agreements and 
contracts, reports, audits, and claim actions, funds obtained as an 
incident of donated food distribution, and other records specifically 
required in this part or in other Departmental regulations, as 
applicable. In addition, distributing agencies must keep a record of 
the value of donated foods each of its school food authorities 
receives, in accordance with Sec.  250.58(e), and records to 
demonstrate compliance with the professional standards for distributing 
agency directors established in Sec.  235.11(g) of this chapter. 
Processors must also maintain records documenting the sale of end 
products to recipient agencies, including the sale of such end products 
by distributors, and must submit monthly performance reports, in 
accordance with Subpart C of this part and with any other recordkeeping 
requirements included in their agreements. Specific recordkeeping 
requirements relating to the use of donated foods in contracts with 
food service management companies are included in Sec.  250.54. Failure 
of the distributing agency, recipient agency, processor, or other 
entity to comply with recordkeeping requirements must be considered 
prima facie evidence of improper distribution or loss of donated foods 
and may result in a claim against such party for the loss or misuse of 
donated foods, in accordance with Sec.  250.16, or in other sanctions 
or corrective actions.
* * * * *
0
6. Revise Subpart C to read as follows:
Subpart C--Processing of Donated Foods
Sec.
250.30 Processing of donated foods into end products.
250.31 Procurement requirements.
250.32 Protection of donated food value.
250.33 Ensuring processing yields of donated foods.
250.34 Substitution of donated foods.
250.35 Storage, food safety, 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.

Subpart C--Processing of Donated Foods


Sec.  250.30  Processing of donated foods into end products.

    (a) Purpose of processing donated foods. Donated foods are most 
commonly provided to processors to process into approved end products 
for use in school lunch programs or other food services provided by 
recipient agencies. The ability to divert donated foods for processing 
provides recipient agencies with more options for using donated foods 
in their programs. For example, donated foods such as whole chickens or 
chicken parts may be processed into precooked grilled chicken strips 
for use in the National School Lunch Program. 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 any party to provide donated foods to a processor for 
processing. The agreements described below are required in addition to, 
not in lieu of, competitively procured contracts required in accordance 
with Sec.  250.31. The processing agreement must be signed by an 
authorized individual for the processor. 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 such processor's 
performance bond or letter of credit under its National Processing 
Agreement, in accordance with Sec.  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 end products produced under the processor's 
National Processing Agreement to eligible recipient agencies in the 
State or to directly purchase such 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 Sec.  250.36, or the use of labels 
attesting to fulfillment of meal pattern requirements in child 
nutrition programs. The distributing agency must utilize the following 
criteria in its selection of processors with which it enters into 
agreements. These criteria will be reviewed by the appropriate FNS 
Regional Office during the management evaluation review of the 
distributing agency.
    (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) Price competitiveness 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.
    (e) In-State Processing Agreement. A distributing agency must enter 
into an In-State Processing Agreement with an in-State processor to 
process donated foods into finished end products, unless it permits 
recipient agencies to enter into Recipient Agency Processing Agreements 
for such purpose, in accordance with paragraph (f) of this section. 
Under an In-State Processing

[[Page 1247]]

Agreement, the distributing agency approves end product data schedules 
(except red meat and poultry) submitted by the processor, holds and 
manages the processor's performance bond or letter of credit, in 
accordance with Sec.  250.32, and assures compliance with other 
processing requirements. The distributing agency may also purchase the 
finished end products for distribution to eligible recipient agencies 
in the State under an In-State Processing Agreement, or may permit 
recipient agencies to purchase such end products, in accordance with 
applicable procurement requirements. In the latter case, the In-State 
Processing Agreement is often called a ``master agreement.'' A 
distributing agency that procures end products on behalf of recipient 
agencies, or that limits recipient agencies' access to the procurement 
of specific end products through its master agreements, must utilize 
the following criteria in its selection of processors with which it 
enters into agreements. These criteria will be reviewed by the 
appropriate FNS Regional Office during the management evaluation review 
of the distributing agency:
    (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) Price competitiveness 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 Agency Processing Agreement. The distributing agency 
may permit a recipient agency to enter into an agreement with an in-
State processor to process donated foods and to purchase the finished 
end products in accordance with a Recipient Agency Processing 
Agreement. A recipient agency may also enter into a Recipient Agency 
Processing Agreement on behalf of other recipient agencies, in 
accordance with an agreement between the parties. The distributing 
agency may also delegate a recipient agency to approve end product data 
schedules or select nationally approved end product data schedules, 
review in-State processor performance reports, manage the performance 
bond or letter of credit of an in-State processor, and monitor other 
processing activities under a Recipient Agency Processing Agreement. 
All such activities must be performed in accordance with the 
requirements of this part. All Recipient Agency Processing Agreements 
must be reviewed and approved by the distributing agency. All recipient 
agencies must utilize the following criteria in its selection of 
processors with which it enters into agreements:
    (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) Price competitiveness 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.
    (g) Ensuring acceptability of end products. A distributing agency 
that procures end products on behalf of recipient agencies, or that 
otherwise limits recipient agencies' access to the procurement of 
specific end products, must provide for testing of end products to 
ensure their acceptability by recipient agencies, prior to entering 
into processing agreements. End products that have previously been 
tested, or that are otherwise determined to be acceptable, need not be 
tested. However, such a distributing agency 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 
to another entity to perform any aspect of processing, without the 
specific written consent of the other party to the agreement (i.e., 
distributing or recipient agency, or FNS, as appropriate). The 
distributing agency may, for example, provide the required consent as 
part of its State Participation Agreement or In-State Processing 
Agreement with the processor.
    (i) Agreements between Processors and Distributors. A processor 
providing end products containing donated foods to a distributor must 
enter into a written agreement with the distributor. The agreement must 
reference, at a minimum, the financial liability (i.e., who must pay) 
for the replacement value of donated foods, not less than monthly end 
product sales reporting frequency, requirements under Sec.  250.11, and 
the applicable value pass through system to ensure that the value of 
donated foods and finished end products are properly credited to 
recipient agencies. Distributing agencies can set additional 
requirements.
    (j) Duration of agreements. An agreement between a distributing, 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 both parties 
to the agreement. Such amendments will be effective for the duration of 
the agreement, unless otherwise indicated.


Sec.  250.31  Procurement requirements.

    (a) Applicability of Federal procurement requirements. Distributing 
and recipient agencies must comply with the requirements in 2 CFR part 
200 and part 400, as applicable, in purchasing end products, 
distribution, or other processing services from processors. 
Distributing and recipient agencies may use procurement procedures that 
conform to applicable State or local laws and regulations, but must 
ensure compliance with the procurement requirements in 2 CFR parts 200 
and 400, as applicable.
    (b) Required information in procurement documents. In all 
procurements of processed end products containing USDA donated foods, 
procurement documents must include the following information:
    (1) The price to be charged for the end product or other processing 
service;
    (2) The method of end product sales that will be utilized and 
assurance that crediting for donated foods will be performed in 
accordance with the applicable requirements for such method of sales in 
Sec.  250.36;
    (3) The value of the donated food in the end products; and
    (4) The location for the delivery of the end products.


Sec.  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 to be received for processing prior 
to the delivery of the donated foods to the processor. The processor 
must provide the performance bond or letter of credit to the 
distributing or recipient agency, in accordance with its In-State or 
Recipient Agency Processing Agreement. However, a multi-State processor 
must provide the performance bond or letter of credit to FNS, in 
accordance with its National Processing Agreement. For multi-State 
processors, the minimum amount of the performance bond or letter of 
credit must be sufficient to cover at least 75 percent of the value of 
donated foods in the processor's physical or book inventory, as 
determined annually and at the discretion of FNS for processors under

[[Page 1248]]

National Processing Agreements. For multi-state processors in their 
first year of participation in the processing program, the amount of 
the performance bond or letter of credit must be sufficient to cover 
100 percent of the value of donated foods, as determined annually, and 
at the discretion of FNS. The surety company from which a bond is 
obtained must be listed in the most current Department of Treasury's 
Listing of Approved Sureties (Department Circular 570).
    (b) Calling in the performance bond or letter of credit. The 
distributing or recipient agency must call in the performance bond or 
letter of credit whenever a processor's lack of compliance with this 
part, or with the terms of the In-State or Recipient Agency Processing 
Agreement, results in a loss of donated foods to a distributing or 
recipient agency and the processor fails to make restitution or respond 
to a claim action initiated to recover the loss. Similarly, 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.


Sec.  250.33  Ensuring processing yields of donated foods.

    (a) End product data schedules. The processor must submit an end 
product data schedule, in a standard electronic format dictated by FNS, 
for approval before it may process donated foods into end products. For 
In-State Processing Agreements, the end product data schedule must be 
approved by the distributing agency and, for products containing 
donated red meat and poultry, the end product data schedule must also 
be approved by the Department. For National Processing Agreements, the 
end product data schedule must be approved by the Department. 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. On the end product data schedule, the processor must 
describe its processing of donated food into an end product, including 
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 (pounds or cases) of donated food needed to produce a 
specific quantity of end product or as the percentage of raw donated 
food versus the quantity returned in the finished end product.
    (b) Processing yields of donated foods. All end products must have 
a processing yield of donated foods associated with its production and 
this processing yield must be indicated on its end product data 
schedule. The processing yield options are limited to 100 percent 
yield, guaranteed yield, and standard yield.
    (1) 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 equal or better in all USDA procurement specifications 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.
    (2) Under guaranteed yield, the processor must ensure that a 
specific quantity of end product (i.e., number of cases) will be 
produced from a specific quantity of donated food, as determined by the 
parties to the processing agreement, and, for In-State Processing 
Agreements, approved by the Department. If necessary, the processor 
must use commercially purchased food of the same generic identity, of 
U.S. origin, and equal or better in all USDA procurement specifications 
than the donated food to provide the guaranteed number of cases of end 
product to the distributing or recipient agency, as appropriate. The 
guaranteed yield must be indicated on the end product data schedule.
    (3) Under standard yield, the processor must ensure that a specific 
quantity of end product (i.e., number of cases), as determined by the 
Department, will be produced from a specific quantity of donated food. 
The established standard yield is higher than the yield the processor 
could achieve under normal commercial production and serves to reward 
those processors that can process donated foods most efficiently. If 
necessary, the processor must use commercially purchased food of the 
same generic identity, of U.S. origin, and equal or better in all USDA 
procurement specifications than the donated food to provide the number 
of cases required to meet the standard yield to the distributing or 
recipient agency, as appropriate. The standard yield must be indicated 
on the end product data schedule.
    (c) 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 the required processing yield of donated 
food or fails to produce end products that meet required 
specifications, 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 equal or better in all USDA procurement specifications than 
the donated food; or
    (2) Return end products that are wholesome but do not meet required 
specifications to production for processing into the requisite quantity 
of end products that meet the required specifications (commonly called 
rework products); or
    (3) If the purchase of replacement foods or the reprocessing of 
products that do not meet the required specifications is not feasible, 
the processor may, with FNS, distributing agency, or recipient agency 
approval, dependent on which entity maintains the agreement with the 
processor, pay the distributing or recipient agency, as appropriate, 
for the replacement value of the donated food or commercial substitute.
    (d) 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. 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 by-product for sale. Crediting must be achieved through 
invoice reduction or by another means of crediting.
    (e) Labeling requirements. The processor must ensure that all end 
product labels meet Federal labeling

[[Page 1249]]

requirements. A processor that claims end products fulfill meal pattern 
requirements in child nutrition programs must comply with the 
procedures required for approval of labels of such end products.


Sec.  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 equal or better in all USDA procurement 
specifications than the donated food. Commercially purchased beef, 
pork, or poultry must meet the same specifications as donated product, 
including inspection, grading, testing, and humane handling standards 
and must be approved by the Department in advance of substitution. The 
processor may choose to make the substitution before the actual receipt 
of the donated food. However, the processor assumes all risk and 
liability if, due to changing market conditions or other reasons, the 
Department's 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 Sec.  
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 distributing or 
recipient agency's storage facility. The processor must process 
backhauled donated foods into end products for sale and delivery to the 
distributing or recipient agency that provided them and not to any 
other agency. Distributing or recipient agencies must purchase end 
products utilizing donated foods backhauled to their contracted 
processor. The processor may not provide payment for backhauled donated 
foods in lieu of processing.
    (c) Grading requirements. The processing of donated beef, pork, and 
poultry must occur under Federal acceptance service grading, which is 
conducted by the Department's Agricultural Marketing Service. Federal 
acceptance service grading ensures that processing is conducted in 
compliance with substitution and yield requirements and in conformance 
with the end product data schedule. The processor is responsible for 
paying the cost of acceptance service grading. The processor must 
maintain grading certificates and other records necessary to document 
compliance with requirements for substitution of donated foods and with 
other 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 (e.g., 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) That even with ample notification time, the processor cannot 
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.


Sec.  250.35  Storage, food safety, 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 Sec.  250.12, 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) Food safety requirements. The processor must ensure that all 
processing of donated foods is conducted in compliance with all 
Federal, State, and local requirements relative to food safety.
    (c) Commingling of donated foods and commercially purchased foods. 
The processor may commingle donated foods and commercially purchased 
foods, unless the processing agreement specifically stipulates that the 
donated foods must be used in processing, and not substituted, 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 Sec.  250.34 and with reporting of donated 
food inventories on performance reports, as required in Sec.  250.37. 
The processor must also ensure that commingling of processed end 
products and other food products, either at its facility or at the 
facility of a commercial distributor, ensures the sale and delivery of 
end products that meet the processing requirements in this subpart--
e.g., by affixing the applicable USDA certification stamp to the 
exterior shipping containers of such end products.
    (d) Limitation on donated food inventories. Inventories of donated 
food at processors may not be in excess of a six-month supply, based on 
an average amount of donated foods utilized for that period, unless a 
higher level has been specifically approved by the distributing agency 
on the basis of a written justification submitted by the processor. 
Distributing agencies are not permitted to submit food orders for 
processors reporting no sales activity during the prior year's contract 
period unless documentation is submitted by the processor which 
outlines specific plans for donated food drawdown, product promotion, 
or sales expansion. When inventories are determined to be excessive for 
a State or processor, e.g., more than six months or exceeding the 
established protection, FNS may require the transfer of inventory and/
or entitlement to another State or processor to ensure utilization 
prior to the end of the school year.
    (e) Reconciliation of excess donated food inventories. If, at the 
end of the school year, the processor has donated food inventories in 
excess of a six-month supply, the distributing agency may, in 
accordance with paragraph (d) of this section, permit the processor to 
carry over such excess inventory into the next year of its agreement, 
if it determines that the processor may efficiently store and process 
such quantity of donated foods. The distributing agency may also direct 
the processor to transfer such donated foods to other recipient 
agencies, or to transfer them to other distributing agencies, in 
accordance with Sec.  250.12(e). 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

[[Page 1250]]

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 or recipient agency, as 
appropriate. 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 Sec.  250.34, to the distributing 
or recipient agency, as appropriate; or
    (2) Transfer the donated foods, or commercially purchased foods 
that meet the substitution requirements in Sec.  250.34, to another 
distributing or recipient agency with which it has a processing 
agreement; or
    (3) If returning or transferring the donated foods, or commercially 
purchased foods that meet the substitution requirements in Sec.  
250.34, is not feasible, the processor may, with FNS approval, pay the 
distributing or recipient agency, as appropriate, for the donated 
foods, at the contract value or replacement value of the donated foods, 
whichever is higher.


Sec.  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, which may be transmitted via 
email 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, at least on a monthly basis, through automated sales 
reports or other electronic or written submission. The processor then 
compensates the distributor for the discount provided for the value of 
the donated food in its sale of end products.
    (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 
not including the value of the donated food used in production. The 
processor must identify any charge for delivery of end products 
separately from the fee-for-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 to the appropriate agency or may permit the 
distributor to bill the agency separately for the delivery of end 
products. When the recipient agency procures storage and distribution 
of processed end products separately from the processing of donated 
foods, the recipient agency may provide the distributor written 
approval to act as the recipient agency's authorized agent for the 
total case price (i.e., including the fee-for-service and the delivery 
charge). The processor must require that the distributor notify it of 
such sales, at least on a monthly basis, through automated sales 
reports, email, or other electronic or written submission.
    (f) Approved alternative method. The processor or distributor may 
sell end products under an alternative method approved by FNS and the 
distributing agency that ensures crediting for the value of donated 
foods contained in the end products.
    (g) Donated food value used in crediting. In crediting for the 
value of donated foods in end product sales, the contract value of the 
donated foods, as defined in Sec.  250.2, 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 either:
    (1) The quantities of approved end products that each recipient 
agency is eligible to receive; or
    (2) The quantity of donated food allocated to each recipient agency 
and the raw donated food (pounds or cases) needed per case of each 
approved end product.


Sec.  250.37  Reports, records, and reviews of processor performance.

    (a) Performance reports. The processor must submit a performance 
report to the distributing agency (or to the recipient agency, in 
accordance with a Recipient Agency Processing Agreement) on a monthly 
basis, which 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 (June) 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) A list of all recipient agencies purchasing end products;
    (2) The quantity of donated foods in inventory 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 donated foods losses;
    (6) The quantity of end products delivered to each eligible 
recipient agency;
    (7) The quantity of donated foods remaining at the end of the 
reporting period;
    (8) A certification statement that sufficient donated foods are in 
inventory or on order to account for the quantities needed for 
production of end products;

[[Page 1251]]

    (9) Grading certificates, as applicable; and
    (10) Other supporting documentation, as required by the 
distributing agency or recipient agency.
    (b) Reporting reductions in donated food inventories. The processor 
must report reductions in donated food inventories on performance 
reports only after sales of end products have been made, or after sales 
of end products through distributors have been documented. 
Documentation of distributor sales must be through the distributing or 
recipient agency's request for a refund (under a refund or rebate 
system) or through receipt of the distributor's automated sales reports 
or other electronic or written reports submitted to the processor 
(under an indirect discount system or under a fee-for-service system).
    (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 and 
in a format established by FNS, 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 foods shipments;
    (3) Production, sale, and delivery of end products, including sales 
through distributors;
    (4) All agreements with distributors;
    (5) Remittance of refunds, invoices, or other records that assure 
crediting for donated foods in end products and for sale of byproducts;
    (6) Documentation of Federal or State inspection of processing 
facilities, as appropriate, and of the maintenance of an effective 
quality control system;
    (7) Documentation of substitution of commercial foods for donated 
foods, including grading certificates, as applicable;
    (8) Waivers of grading requirements, as applicable; and
    (9) 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) In-State Processing Agreements and State Participation 
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, as required by the distributing agency (e.g., sales invoices or 
copies of refund payments);
    (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 the value of donated foods contained in end 
products;
    (3) Recipient Agency Processing Agreements, as applicable, and, in 
accordance with such agreements, other records included in paragraph 
(e) 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 other records 
that it must maintain, in accordance with the requirements in paragraph 
(e) of this section, 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; and
    (4) Accurately reports donated food inventory activity and 
maintains inventories within approved levels.


Sec.  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 multi-State 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 distributing or recipient agency from 
which the foods were received;
    (6) Any applicable labeling requirements;
    (7) Other processing requirements implemented by the distributing 
agency, 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;
    (9) A statement that the agreement may be terminated immediately if 
the processor has not complied with its terms and conditions; and
    (10) A statement requiring the processor to enter into an agreement 
with any and all distributors delivering processed end products to 
recipient agencies that ensures adequate data sharing, reporting, and 
crediting of donated foods, in accordance with Sec.  250.30(i).
    (c) Required provisions of the In-State Processing Agreement. An 
In-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;

[[Page 1252]]

    (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 Sec.  250.32;
    (6) End product data schedules for all end products, with all 
required information, in accordance with Sec.  250.33(a);
    (7) Assurance that the processor will meet processing yields for 
donated foods, in accordance with Sec.  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 Sec.  250.33(c);
    (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 Sec.  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 Sec.  250.35(f);
    (15) The specific method(s) of end product sales permitted, in 
accordance with Sec.  250.36;
    (16) Assurance that the processor will credit recipient agencies 
for the value of all donated foods, in accordance with Sec.  250.36;
    (17) Assurance that the processor will submit performance reports 
and meet other reporting and recordkeeping requirements, in accordance 
with Sec.  250.37;
    (18) Assurance that the processor will obtain independent CPA 
audits and will correct any deficiencies identified in such audits, in 
accordance with Sec.  250.20;
    (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;
    (22) A statement that extensions or renewals of the agreement, if 
applicable, are contingent upon the fulfillment of all agreement 
provisions; and
    (23) A statement requiring the processor to enter into an agreement 
with any and all distributors delivering processed end products to 
recipient agencies that ensures adequate data sharing, reporting, and 
crediting of donated foods, in accordance with Sec.  250.30(i).
    (d) Required provisions for Recipient Agency Processing Agreement. 
The Recipient Agency Processing Agreement must contain the same 
provisions as an In-State Processing Agreement, to the extent that the 
distributing agency permits the recipient agency to perform activities 
normally performed by the distributing agency under an In-State 
Processing Agreement (e.g., approval of end product data schedules, 
review of performance reports, or management of the performance bond). 
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.


Sec.  250.39  Miscellaneous provisions.

    (a) Waiver of processing requirements. The Food and Nutrition 
Service may waive any of the requirements contained in this part for 
the purpose of conducting demonstration projects to test program 
changes designed to improve the processing of donated foods.
    (b) Processing activity guidance. Distributing agencies must 
develop and provide a processing manual or similar procedural material 
for guidance to contracting agencies, recipient agencies, and 
processors. Distributing agencies must revise these materials as 
necessary to reflect policy and regulatory changes. This guidance 
material must be provided to contracting agencies, recipient agencies, 
and processors at the time of the approval of the initial agreement by 
the distributing agency, when there have been regulatory or policy 
changes which necessitate changes in the guidance materials, and upon 
request. The manual must include, at a minimum, statements of the 
distributing agency's policies and procedures regarding:
    (1) Contract approval;
    (2) Monitoring and review of processing activities;
    (3) Recordkeeping and reporting requirements;
    (4) Inventory controls; and
    (5) Refund applications.
    (c) Guidance or information. Guidance or information relating to 
the processing of donated foods is included on the FNS Web site or may 
otherwise be obtained from FNS.

    Dated: December 23, 2016.
Richard Lucas,
Acting Administrator, Food and Nutrition Service.
[FR Doc. 2016-31561 Filed 1-4-17; 8:45 am]
 BILLING CODE 3410-30-P