Revisions and Clarifications in Requirements for the Processing of Donated Foods, 50250-50273 [06-7073]

Agencies

• DEPARTMENT OF AGRICULTURE
• Food and Nutrition Service

[Federal Register Volume 71, Number 164 (Thursday, August 24, 2006)]
[Proposed Rules]
[Pages 50250-50273]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-7073]



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Part V





Department of Agriculture





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Food and Nutrition Service



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7 CFR Part 250



Revisions and Clarifications in Requirements for the Processing of 
Donated Foods; Proposed Rule

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

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DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 250

RIN 0584-AD76


Revisions and Clarifications in Requirements for the Processing 
of Donated Foods

AGENCY: Food and Nutrition Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This rule proposes to revise and clarify requirements for the 
processing of donated foods, in order to incorporate processing options 
tested in demonstration projects, to more effectively ensure 
accountability for donated foods provided for processing, and to 
streamline current reporting and review requirements. Most 
significantly, it would require multi-State processors to enter into 
National Processing Agreements to process donated foods into end 
products, and would permit processors to substitute donated beef and 
pork with commercially purchased beef and pork of U.S. origin and of 
equal or better quality than the donated food. The rule would also 
rewrite regulatory provisions in plain language, to make them easier to 
read and understand for the general public.

DATES: To be assured of consideration, comments must be received on or 
before November 22, 2006.

ADDRESSES: The Food and Nutrition Service invites interested persons to 
submit comments on this proposed rule. You may submit comments, 
identified by RIN number 0584-AD76, by any of the following methods:
    E-mail: Send comments to Robert.Delorenzo@fns.usda.gov. Include RIN 
number 0584-AD76 in the subject line of the message.
    Fax: Submit comments by facsimile transmission to (703) 305-2420. 
Disk or CD-ROM: Submit comments on disk or CD-ROM to Lillie F. Ragan, 
Assistant Branch Chief, Policy Branch, Food Distribution Division, Food 
and Nutrition Service, U.S. Department of Agriculture, Room 500, 3101 
Park Center Drive, Alexandria, Virginia 22302-1594.
    Mail: Send comments to Lillie F. Ragan at the above address.
    Hand Delivery or Courier: Deliver comments to the above address.
    Federal eRulemaking Portal: Go to https://www.regulations.gov. 
Follow the online instructions for submitting comments.
    Further information on the submission of comments, or the review of 
comments submitted, may be found under SUPPLEMENTARY INFORMATION, Part 
III, Procedural Matters.

FOR FURTHER INFORMATION CONTACT: Lillie F. Ragan at the above address 
or telephone (703) 305-2662. You may also contact Robert DeLorenzo by 
e-mail at Robert.Delorenzo@fns.usda.gov.

SUPPLEMENTARY INFORMATION: 

I. Background

    The Department of Agriculture (the Department or USDA) provides 
donated foods to State distributing agencies for distribution to school 
food authorities participating in the National School Lunch Program 
(NSLP), and to recipient agencies in other child nutrition or food 
distribution programs. In accordance with Federal regulations in 7 CFR 
Part 250, distributing agencies may provide the donated foods to 
commercial processors for processing into end products that are more 
suitable for use in school lunch programs or other food programs. The 
regulations ensure that State and local agencies, and program 
recipients, receive the full benefit of the donated foods provided to 
such processors for processing into end products. Distributing agencies 
must enter into agreements with processors to ensure compliance with 
the requirements in Federal regulations.
    Over the last 30 years or so, the quantity and variety of donated 
foods provided in the National School Lunch Program has increased 
substantially. Consequently, the processing of the donated foods into 
more useful end products has become an integral part of the successful 
operation of the school lunch program. In the last several years, the 
Department's Food and Nutrition Service (FNS) has taken a number of 
steps to facilitate the use of donated foods by commercial processors 
in the interest of providing more efficient and effective service to 
school food authorities and other recipient agencies. Most of these 
changes have been implemented as a result of discussions with State and 
local program operators, processors, and industry consultants.
    In a final rule published in the Federal Register on October 23, 
2002 at 67 FR 65011, 7 CFR Part 250 was amended to expand the types of 
donated foods that processors were permitted to substitute with 
commercially purchased foods without prior FNS approval. The rule 
permitted processors to substitute donated fruits, vegetables, and eggs 
with commercially purchased foods of the same generic identity, of U.S. 
origin, and of equal or better quality than the donated foods. 
Additionally, limited substitution of donated poultry was permitted, in 
accordance with the processor's approved plan. Substitution allows 
processors to provide finished end products to school food authorities 
in a more efficient manner, which permits the schools to better utilize 
the donated foods in the school food service. Only the substitution of 
donated beef and pork is currently prohibited.
    Since June 30, 2001, FNS has conducted a demonstration project to 
allow selected processors to substitute commercially purchased beef and 
pork for donated beef and pork, in accordance with an approved plan. 
The commercial product must be of U.S. origin, and of equal or better 
quality than the donated food. Since USDA's purchase specifications for 
ground beef and pork are more stringent than commercially available 
ground beef and pork, few processors have chosen to participate in the 
demonstration project. However, FNS has concluded that all processors 
should have the option to substitute commercial beef and pork, as long 
as they can meet the same specifications required of donated beef and 
pork.
    In July 2004, FNS initiated a demonstration project to allow 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. Their review and 
approval, however, is a time and labor-intensive activity for State 
distributing agencies. Since processors are not required to submit end 
product data schedules for approval in each State in which they 
operate, national approval under the demonstration project has reduced 
the time and labor burden considerably for both distributing agencies 
and processors.
    In conjunction with the demonstration project allowing national 
approval of end product data schedules, FNS has provided multi-State 
processors with the option of signing National Processing Agreements. 
Under the National Processing Agreement, FNS monitors the processor's 
national inventory of donated foods, and holds and manages the 
processor's performance bond or letter of credit, which protects the 
value of the processor's donated food inventories. The monitoring and 
protection of donated food inventories held by processors at the 
national level has further reduced the burden on distributing agencies. 
FNS has entered

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into National Processing Agreements with an increasing number of multi-
State processors since the initiation of the demonstration project. 
Under their State processing agreements (called State Participation 
Agreements), distributing agencies select the processor's nationally 
approved end products for sale in the State, and may include other 
State-specific processing requirements.
    The regulatory amendments proposed in this rule would incorporate 
into 7 CFR Part 250 the processing options provided under the 
demonstration projects described above. They would also more 
effectively ensure accountability for donated foods provided for 
processing while streamlining current reporting and review requirements 
imposed on State distributing agencies and processors. Most 
significantly, the rule proposes to:
    (1) Permit substitution of donated beef and pork with commercial 
beef and pork of U.S. origin, and of equal or better quality than the 
donated foods;
    (2) Require multi-State processors to sign National Processing 
Agreements with FNS, and to submit end product data schedules to the 
Department for approval at the national level;
    (3) Require multi-State processors to submit a performance bond or 
letter of credit to FNS to protect the value of the processors' donated 
food inventories;
    (4) Require in-State processors to obtain independent Certified 
Public Accountant (CPA) audits every three years, and revise upward the 
donated food value thresholds that determine the required frequency of 
such audits for multi-State processors; and
    (5) Remove the requirements that the distributing agency conduct an 
on-site review of in-State processors every two years, and develop a 
system to verify sales of end products through commercial distributors.
    As discussed below, we propose to amend current Sec. Sec.  250.3, 
250.13, 250.16, 250.17, 250.19, and 250.24, and to completely revise 
Sec.  250.18, and 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 for the general public. The proposed changes to 7 CFR Part 
250 are discussed in detail below.

II. Discussion of the Rule's Provisions

A. Definitions, Sec.  250.3

    Due to developments in food distribution programs, and for the 
purpose of clarification, we propose to remove, revise, and add 
definitions in current Sec.  250.3 relating to processing of donated 
foods. We propose to remove the definitions of ``Contract value of the 
donated foods'', ``Contracting agency'', ``Discount system'', ``Fee-
for-service'', ``Refund'', ``Refund application'', ``Refund system'', 
and ``Substituted food''. The proposed definition of ``Processing 
agreement value'' would replace the current definition of ``Contract 
value of the donated foods''. The term ``contracting agency'' would be 
replaced throughout the proposed regulatory provisions with the 
specific agency (i.e., distributing and/or recipient agency) that may 
enter into a processing agreement. The meaning of the other terms being 
removed is clear in the context of the proposed regulatory provisions, 
and no longer require separate definitions.
    We propose to revise the definitions of ``Distributor'', ``Multi-
State processor'' and ``Substitution''. The revised definition of 
``Distributor'' would clarify that it is a commercial enterprise that 
may sell and/or deliver finished end products or store and distribute 
donated foods to distributing or recipient agencies. We propose to 
revise the current definition of ``Multi-State processor'' only to 
indicate that such a processor may operate in accordance with an 
agreement with a distributing or recipient agency.
    Lastly, we propose to revise the definition of ``Substitution'' to 
simply indicate that it is the use of commercially purchased foods in 
place of donated foods, in accordance with the requirements in 7 CFR 
Part 250, as we propose to revise them in this rule. The current 
requirement that substitution of donated foods must be with commercial 
foods of the same generic identity, of domestic origin, and of equal or 
better quality than the donated food, would be included in the new 
Sec.  250.34(a), as proposed in this rule.
    The current provision for the substitution of donated nonfat dry 
milk with concentrated skim milk would be removed. Nonfat dry milk is a 
food commonly purchased by the Department under price support 
legislative authority and donated for use in food assistance programs. 
Hence, substitution of this donated food is rarely made at the current 
time, and is not encouraged by the Department. Additionally, it is a 
very complex substitution to make, as the processor must assure that 
the milk solids in the skim milk fully replace the quantity of milk 
solids in the substituted nonfat dry milk. The current stipulation that 
substitution must meet the 100 percent yield requirement would be 
removed, as processing yield requirements for donated foods, as well as 
commercially purchased foods substituted for them, would be included in 
the new Sec.  250.33.
    The provision describing the limited substitution of poultry would 
be removed. As proposed in the new Sec.  250.34, we would allow 
substitution of donated poultry under the same conditions as 
substitution of other donated foods, with the exception of backhauled 
product. All proposed requirements for the substitution of donated 
foods are fully discussed later in section II.H.5 of the preamble.
    We propose to add definitions of ``Backhauling'', ``Commingling'', 
``End product data schedule'', ``In-State processor'', ``National 
Processing Agreement'', ``Processing agreement value'', ``Recipient 
Processing Agreement'', ``Replacement value'', ``7 CFR Part 3052'', 
``Split shipment'', ``State Participation Agreement'', and ``State 
Processing Agreement''. A definition of ``Backhauling'' would describe 
a means of delivery of donated food to a processor that is sometimes 
used by recipient agencies. A definition of ``Commingling'' would 
describe the common storage of donated foods with commercially 
purchased foods, as currently permitted for processors and most 
recipient agencies. A definition of ``End product data schedule'' would 
convey the important function of this document in describing the 
processing of donated foods into finished end products. A definition of 
``In-State processor'' would help the reader distinguish such an 
enterprise from a multi-State processor. Definitions of ``National 
Processing Agreement'', ``Recipient Processing Agreement'', ``State 
Participation Agreement'', and ``State Processing Agreement'' would 
help the reader understand the different types of processing agreements 
permitted. These processing agreements are further described in the new 
Sec.  250.30. A definition of ``Processing agreement value'' would 
clarify the donated food value that must be used by processors in 
crediting for donated foods in finished end products. A definition of 
``7 CFR Part 3052'' would identify the Departmental regulations 
relating to audit requirements for State and local governments and 
nonprofit organizations that receive Federal grants. A definition of 
``Replacement value'' would clarify the donated food

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value that must be used by processors to ensure compensation for 
donated foods lost in processing or other activities, and would 
distinguish it from the processing agreement value. A definition of 
``Split shipment'' would describe a commonly used means of delivering 
donated foods to distributing or recipient agencies, or to processors.

B. Distribution and Control of Donated Foods, Sec.  250.13

    We propose to amend current Sec.  250.13(c), which describes the 
timing of transfer of title to donated foods, and the agency to which 
title is transferred. Currently, title to donated foods transfers to 
the distributing agency upon its acceptance of donated foods at the 
time and place of delivery. However, in many cases, recipient agencies 
receive direct shipments of donated foods from USDA vendors, bypassing 
the distributing agency. In such cases, title should pass directly to 
the recipient agency. Hence, we propose to state that title to donated 
foods passes to the distributing or recipient agency, as appropriate, 
at the time and place of delivery. However, we also propose to add an 
exception to the timing of title transfer, in accordance with the 
requirements under National Processing Agreements proposed in this 
rule. In the new 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 by such a processor, 
FNS would not have the authority to call in the bond if the processor 
failed to comply with processing requirements. Hence, we propose to 
state that title to donated foods provided to a multi-State processor, 
in accordance with its National Processing Agreement, transfers to the 
distributing or recipient agency, as appropriate, upon the acceptance 
of finished end products at the time and place of delivery. We propose 
to stipulate that, notwithstanding transfer of title, the distributing 
agency must ensure that donated foods and end products are used in 
accordance with the requirements of 7 CFR Part 250.

C. Maintenance of Records, Sec.  250.16

    In current Sec.  250.16(a)(3), distributing agencies are required 
to maintain records of refusal of donated foods by school food 
authorities, if a distributing agency permits those school food 
authorities to select a limited variety of donated foods from the full 
list of donated foods that USDA has made available for distribution. 
Such an ``offer and refusal'' system is described in current Sec.  
250.48(f). However, in accordance with a proposed rule published in the 
Federal Register on June 8, 2006 at 71 FR 33344, we would remove the 
``offer and refusal'' system of ordering or selecting donated foods and 
require that the distributing agency permit school food authorities to 
order from the full list of available foods, and to distribute all such 
foods to them that can be distributed in a cost-effective manner. Under 
that proposed revision, refusal of donated foods, and records 
documenting such refusals, would be obsolete. Hence, we propose to 
remove current Sec.  250.16(a)(3).
    In current Sec.  250.16(a)(4), processors, food service management 
companies, warehouses, and other entities must maintain records of 
receipt, distribution, storage, and inventory of donated foods. 
Processors must also maintain records such as formulas, recipes, 
production records, and receipt of shipments to document their use of 
donated foods. As discussed later in the preamble, we are proposing to 
include specific recordkeeping requirements for processors in the new 
Sec.  250.37(d), and in the proposed rule published in the Federal 
Register on June 8, 2006 at 71 FR 33344, we proposed to include 
specific recordkeeping requirements for food service management 
companies. Hence, we propose to revise this section to state that 
processors and food service management companies must comply with the 
applicable recordkeeping requirements in 7 CFR Part 250, and with any 
other recordkeeping requirements included in their agreements or 
contracts. We also propose to require that storage facilities and 
distributors maintain records documenting the receipt, distribution, 
inventory, and disposal of donated foods or end products sufficient to 
ensure compliance with requirements in 7 CFR Part 250, and with any 
other such requirements in their agreements or contracts with 
distributing or recipient agencies. The specific types of records that 
such entities would have to maintain would depend on the agency with 
which they have a contract or agreement, and the specific donated food 
activities they are conducting under the contract or agreement.
    In accordance with the proposed removal of Sec.  250.16(a)(3), we 
would redesignate current Sec.  250.16(a)(4), (a)(5), and (a)(6), as 
Sec.  250.16(a)(3), (a)(4), and (a)(5), respectively.

D. Reports, Sec.  250.17

    Current Sec.  250.17(b) and (c) contains reporting requirements to 
ensure processors' compliance with requirements in 7 CFR Part 250. In 
current Sec.  250.17(b), the distributing agency must submit a report 
of processors' inventories to the FNS Regional Office on a quarterly 
basis (this requirement is also contained in current Sec.  250.30(o)). 
In current Sec.  250.17(c), processors must submit monthly performance 
reports to the distributing agency. We propose to remove Sec.  
250.17(b). FNS Regional Offices do not currently review reports of 
processors' donated food inventories. The distributing agency is 
responsible for monitoring such inventories through the review of 
processors' performance reports, and, in accordance with current Sec.  
250.30(n)(1), to ensure that processors do not maintain excessive 
inventories. As discussed in section II.H.8 of the preamble, we are 
proposing to include more specific reporting requirements for 
processors in the new Sec.  250.37. Under the proposals, multi-State 
processors would be required to submit monthly reports of their 
national donated food inventories to FNS Headquarters for review. 
Accordingly, we propose to revise current Sec.  250.17(c) (redesignated 
as paragraph (b) by this rule) to require processors to submit 
performance reports and other supporting documentation, as required by 
the distributing agency or by FNS. In accordance with the removal of 
Sec.  250.17(b), we would redesignate current Sec.  250.17(c), (d), and 
(e), as Sec.  250.17(b), (c), and (d), respectively. We propose to 
remove current Sec.  250.17(f), which stipulates that the date shown on 
a report submitted by facsimile machine may serve as the submission 
date.

E. Audits, Sec.  250.18

    Currently, Sec.  250.18 describes audit requirements for 
distributing and recipient agencies and for multi-State processors. We 
propose to revise this section to clarify audit requirements for 
distributing and recipient agencies, to include new audit requirements 
for in-State processors, and to amend audit requirements for multi-
State processors.
    In current Sec.  250.18(a), fiscal matters must be reviewed in 
audits conducted under the Single Audit Act, and in accordance with 
Departmental regulations in 7 CFR Part 3015. However, the current 
Departmental regulations establishing audit requirements for State and 
local governments and nonprofit organizations that receive Federal 
grants

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are contained in 7 CFR Part 3052, which incorporates requirements in 
OMB Circular A-133. In accordance with 7 CFR Part 3052 and OMB Circular 
A-133, a State or local government or nonprofit organization that 
expends at least $500,000 in Federal awards in a school or fiscal year 
must obtain a single audit for that year. A program-specific audit may 
be substituted for the single audit if the auditee operates only one 
Federal program, or one recognized cluster of programs (e.g., National 
School Lunch, School Breakfast, and Summer Food Service Programs). A 
State or local government or nonprofit organization that expends less 
than $500,000 in Federal awards in a year is not required to obtain an 
audit for that year. In determining if an audit is required, the value 
of donated foods must be considered, along with other Federal 
expenditures.
    We propose to include these audit requirements in the new Sec.  
250.18(a), as they apply to distributing and recipient agencies, and to 
reference the Departmental regulations in 7 CFR Part 3052. We also 
propose to require that the donated food values established by the 
distributing agency to credit a recipient agency's donated food 
assistance level, in accordance with current Sec.  250.13(a)(5), must 
be used. We would indicate that, for a recipient agency utilizing a 
single inventory management system, the value of donated foods received 
in a year must be considered, rather than the value of donated foods 
used or distributed. Under single inventory management, donated foods 
are commingled with commercially purchased foods, and the amount or 
value used or distributed may not be discernible.
    The requirements contained in 7 CFR Part 3052 and OMB Circular A-
133 do not apply to commercial enterprises providing goods and services 
to distributing or recipient agencies in accordance with agreements or 
contracts. However, in accordance with current Sec.  250.18(b), multi-
State processors must obtain an independent CPA audit at a frequency 
determined by the value of the donated foods they receive for 
processing in a year. Currently, a multi-State processor must obtain an 
independent CPA audit for any year in which it receives more than 
$250,000 in donated foods; every two years, if it receives $75,000 to 
$250,000 in donated foods each year; and every three years, if it 
receives less than $75,000 in donated foods each year. Such audits must 
be paid for by the processor.
    In-State processors are not currently required to obtain an 
independent CPA audit. In order to ensure their compliance with program 
requirements, the distributing agency must conduct an on-site review of 
such processors at least once every two years, in accordance with 
current Sec.  250.19(b)(1)(iii). However, the performance of on-site 
reviews is a costly and time-consuming exercise for distributing 
agencies. Hence, we propose instead to require in-State processors to 
obtain independent CPA audits as well, and, as discussed in section 
II.F of the preamble, to remove the on-site review requirement 
currently imposed on the distributing agency for such processors.
    In the new Sec.  250.18(b), we propose to require that all in-State 
processors obtain an independent CPA audit in the first year that they 
receive donated foods for processing. We propose to require that, after 
the first year, in-State processors obtain an independent CPA audit 
every three years. As currently required for multi-State processors, we 
propose to require that in-State processors pay the cost of the audit. 
We propose to amend the current audit requirement for multi-State 
processors by requiring that a multi-State processor obtain an 
independent CPA audit in each of the first three years that it receives 
donated foods for processing. After the first three years, a multi-
State processor must obtain an audit at a frequency determined by the 
average value of donated foods received for processing per year, as 
currently required. However, we propose to revise upward the current 
thresholds for determining the required frequency of such audits to 
reflect the much larger volume of donated foods provided to such 
processors for processing over the last several years. Hence, we 
propose to require a multi-State processor to obtain an independent CPA 
audit:
    (1) Annually, if it receives, on average, more than $5,000,000 in 
donated foods for processing per year;
    (2) Every two years, if it receives, on average, between $1,000,000 
and $5,000,000 in donated foods for processing per year; and
    (3) Every three years, if it receives, on average, less than 
$1,000,000 in donated foods for processing per year.
    As in audits of distributing and recipient agencies, we propose to 
require that the donated food values established by the distributing 
agency in accordance with current Sec.  250.13(a)(5) must be used to 
determine if an audit is required. We also propose to clarify that 
audits must determine processor compliance with the requirements in 
this part, and must be conducted in accordance with the FNS Audit Guide 
for Processors. However, we propose to remove the current stipulation 
that, at the discretion of FNS, auditors will be required to attend 
training sessions conducted by the Department.
    In the new Sec.  250.18(c), we propose to indicate that a 
distributing or recipient agency must submit reports and corrective 
action plans, and undertake corrective actions in response to the 
audit, in accordance with the requirements in 7 CFR Part 3052. We 
propose to clarify that, by December 31st of each year in which an 
audit is required, a multi-State processor is responsible for ensuring 
that a copy of the audit is provided to FNS, while an in-State 
processor must ensure that a copy of the audit is provided to the 
distributing agency. We also propose to include the requirement in 
current Sec.  250.18(b)(6) that the processor provide verification to 
FNS, or the distributing agency, as appropriate, that all deficiencies 
identified in the audit have been corrected, or provide a corrective 
action plan with timelines for correcting all deficiencies identified 
in the audit.
    In the new Sec.  250.18(d), we propose to indicate that a 
distributing or recipient agency is subject to sanctions for failure to 
obtain the required audit, or for failure to correct deficiencies 
identified in audits. Such sanctions may include the withholding, 
suspension, or termination of a Federal award. In current Sec.  
250.18(b)(5), noncompliance with audit requirements makes the processor 
ineligible to continue to receive donated foods for processing. We 
propose to state that FNS may terminate a processor's National 
Processing Agreement, or prohibit the further distribution of donated 
foods to a processor, for its failure to obtain the required audit, or 
for failure to correct the deficiencies identified in the audit. We 
propose to state that a distributing or recipient agency may 
immediately terminate an agreement with a processor, and must not 
extend or renew such an agreement, for the same reasons, in accordance 
with the new Sec.  250.38(e).
    In current Sec.  250.18(a), the Department, the Comptroller General 
of the United States, or any of their authorized representatives, may 
conduct audits or inspections of distributing, subdistributing, or 
recipient agencies, or with commercial enterprises with which they have 
agreements or contracts, to assure compliance with the requirements of 
this part. We propose to maintain that and move it to new Sec.  
250.18(e).

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F. Reviews, Sec.  250.19

    As previously described, we propose to remove current Sec.  
250.19(b)(1)(iii), which requires the distributing agency to perform an 
on-site review of all in-State processors at least once every two 
years. In accordance with the removal of Sec.  250.19(b)(1)(iii), we 
would redesignate current Sec.  250.19(b)(1)(iv) and (b)(1)(v), as 
Sec.  250.19(b)(1)(iii) and (b)(1)(iv), respectively.
    Currently, in Sec.  250.19(b)(2), the distributing agency must 
develop a system to verify sales of end products when a processor has 
provided end products to a distributor, and the distributor sells such 
end products to recipient agencies at a discount. The sales 
verification system must include a statistically valid sample of such 
sales over a six-month period. If the distributing agency delegates 
this sales verification requirement to the processor, it must select a 
subsample of the processor's findings, and reverify them. Current 
regulations also require the distributing agency to submit sales 
verification findings to the FNS Regional Office. The purpose of such 
sales verification is to assure that the distributor has sold the 
requisite quantity of end products to recipient agencies.
    We propose to remove Sec.  250.19(b)(2), and the requirement that 
the distributing agency develop a sales verification system, as 
described above. In the new Sec. Sec.  250.36(d) and 250.37(d), as 
described later in the preamble, we are proposing to require the 
processor to ensure that the distributor notify it, on a monthly basis, 
of its sale of end products to recipient agencies at a discount, or 
under a fee-for-service, through automated sales reports, or other 
electronic or written submission, and to require the processor to 
maintain records of such notification. These records would be available 
for review by auditors, in conducting the audits required in the 
proposed Sec.  250.18. We are also proposing, in the new Sec.  
250.37(f), to require recipient agencies to maintain records of the 
receipt of end products from processors or distributors. These records 
would also be available for review by the distributing agency or other 
parties, including auditors. Hence, in place of the current burden 
imposed on the distributing agency to develop a system to verify end 
product sales, we would ensure, through appropriate documentation, that 
such sales have been made, and that recipient agencies have received 
the end products that they are due. The distributing agency may still 
require, at its option, that the processor submit documentation to 
support information included in the processor's performance report, 
including sales of end products to recipient agencies. The distributing 
agency may also contact recipient agencies to ensure receipt of end 
products.
    In accordance with the removal of Sec.  250.19(b)(2), we would 
redesignate current Sec.  250.19(b)(3), (b)(4), (b)(5), and (b)(6), as 
Sec.  250.19(b)(2), (b)(3), (b)(4), and (b)(5), respectively. However, 
we propose to remove the last sentence in the redesignated Sec.  
250.19(b)(2), which requires the distributing agency to submit a copy 
of the processor review report to the FNS Regional Office.

G. Distributing Agency Performance Standards, Sec.  250.24

    In current Sec.  250.24(g), distributing agencies must provide for 
the processing of donated foods, in accordance with current Sec.  
250.30, and must inform recipient agencies of the processing options 
available to them. Distributing agencies must also test end products, 
prior to entering into a processing agreement, or may allow recipient 
agencies to test end products, and must monitor acceptability of end 
products. We propose to retain the current requirements in the revised 
Sec.  250.24(g), but to reference requirements under Subpart C, and to 
clarify that the distributing agency must ensure that recipient 
agencies are aware of the processing options available to them. Most of 
the information on processing is available on the FNS Web site or from 
other readily available sources, as indicated in the new Sec.  
250.39(b).

H. Subpart C--Processing of Donated Foods

    As previously mentioned, we propose to completely revise current 
Subpart C, Processing and Labeling of Donated Foods, which currently 
contains only Sec.  250.30. In revising Subpart C, we would restructure 
it into 10 new sections, to more clearly present the specific 
processing requirements, and would rewrite them in plain language. We 
propose to include the requirements for specific processing activities 
more or less in the order in which they occur; i.e., entering into 
processing agreements, processing of donated foods into end products, 
sale of end products, submission of reports, etc. We also propose to 
change the heading of Subpart C to Processing of Donated Foods.  The 
new sections proposed under the revised Subpart C include the 
following:
    250.30, Types of processing agreements.
    250.31, Procurement requirements.
    250.32, Protection of donated food value.
    250.33, Processing yields of donated foods.
    250.34, Substitution of donated foods.
    250.35, Storage, inspection, quality control, and inventory 
management.
    250.36, End product sales and crediting for the value of donated 
foods.
    250.37, Reports, records, and reviews of processor performance.
    250.38, Provisions of agreements.
    250.39, Miscellaneous provisions.
1. Types of Processing Agreements, Sec.  250.30
    In the new 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, 
State, and Recipient Processing Agreements. However, we propose to 
include the specific provisions required for each type of agreement in 
the new Sec.  250.38, as the reason for their inclusion will only be 
clear with an understanding of the processing requirements contained in 
the preceding sections.
    In the new 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. In current practice, 
such contracting is performed under agreements entered into between the 
parties; hence, in this rule, we use the term agreement, rather than 
contract, to describe any legal compact entered into with a processor 
to process donated foods. Currently, most donated foods are processed 
in accordance with State Processing Agreements. However, some large 
school food authorities currently have agreements with processors to 
process donated foods and purchase the finished end products, as 
permitted by distributing agencies. Additionally, as previously 
described, FNS has permitted multi-State processors to process donated 
foods in accordance with National Processing Agreements under a 
demonstration project initiated in 2004.

[[Page 50255]]

    In the new 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 new Sec.  250.30(b) the stipulation 
in current Sec.  250.30(c)(4)(ix) that an agreement may not obligate 
the distributing or recipient agency, or the Department, to provide 
donated foods to a processor for processing. USDA purchase and donation 
of foods is dependent on market conditions, and specific foods may not 
be available for donation in certain years. Additionally, we propose to 
retain in this new Sec.  250.30(b) the requirement in current Sec.  
250.30(p) that, for processing of donated foods in child nutrition 
programs, the distributing agency must provide the State administering 
agency (if a different agency) with an opportunity to review its 
processing agreements to ensure compliance with nutritional and 
labeling requirements. We propose to remove the stipulation in current 
Sec.  250.30(c)(1) that a processing agreement must be in standard 
written form.
    In accordance with the National Processing Agreements permitted 
under the demonstration project, FNS reviews and approves end product 
data schedules submitted by multi-State processors, and holds and 
manages the processor's performance bond or letter of credit to protect 
the value of donated food inventories. FNS also monitors the 
processor's national donated food inventory through the review of 
performance reports, which processors must submit to FNS on a monthly 
basis. As previously mentioned, FNS' performance of these activities 
has significantly reduced the labor and paperwork burden for both 
processors and distributing agencies. Hence, in the new Sec.  
250.30(c), we propose to require that a multi-State processor enter 
into a National Processing Agreement with FNS to process donated foods 
into end products, in accordance with end product data schedules 
approved by FNS. We would also indicate that, as proposed in the new 
Sec.  250.32, FNS holds and manages the processor's performance bond or 
letter of credit to protect the value of donated food inventories under 
the National Processing Agreement. We would indicate that FNS does not 
itself procure or purchase end products under such agreements, and that 
a multi-State processor must enter into a State Participation Agreement 
with the distributing agency in order to sell nationally approved end 
products in the State, as proposed in the new Sec.  250.30(d). However, 
a distributing agency may still choose to provide donated foods to a 
multi-State processor for processing in accordance with its State 
Processing Agreement, as described below, irrespective of that 
processor's National Processing Agreement.
    In the new Sec.  250.30(d), we propose to require the distributing 
agency to enter into a State Participation Agreement with a multi-State 
processor to permit the sale of end products produced under the 
processor's National Processing Agreement in the State, as previously 
indicated. The State Participation Agreement is currently utilized in 
conjunction with National Processing Agreements in the demonstration 
project. Under the State Participation Agreement, we propose to permit 
the distributing agency to select the processor's nationally approved 
end products for sale to eligible recipient agencies within the State, 
or to directly purchase such end products. The processor may provide a 
list of such nationally approved end products in a summary end product 
data schedule. We also propose to permit the distributing agency to 
include other processing requirements in the State Participation 
Agreement, such as the specific methods of end product sales permitted 
in the State, in accordance with the new 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.
    Currently, a distributing agency must enter into a State Processing 
Agreement with a processor to process donated foods into finished end 
products for sale in the State. Under such an agreement, the 
distributing agency may purchase the finished end products for 
distribution to eligible recipient agencies. However, it may also 
select a number of processors with which it enters into such 
agreements, and permit recipient agencies to purchase finished end 
products from them, in accordance with applicable procurement 
requirements. These latter types of State Processing Agreements are 
commonly called ``master agreements''. The distributing agency must 
utilize selection criteria in current Sec.  250.30(c)(1) to select 
processors with which to enter into master agreements. Under all State 
Processing Agreements, the distributing agency must approve end product 
data schedules submitted by the processor, hold and manage the 
processor's performance bond or letter of credit, and assure compliance 
with all processing requirements.
    In the new Sec.  250.30(e), we propose to clarify the distinction 
between master agreements and other State Processing Agreements, and to 
include in this new section the required criteria in current Sec.  
250.30(c)(1) for selecting processors under master agreements. However, 
we propose to remove the statement that selection criteria will be 
reviewed by the FNS Regional Office during its management evaluation of 
the distributing agency. We propose to require that the distributing 
agency enter into a State Processing Agreement with an in-State 
processor to process donated foods, as currently required. We would 
also indicate that the distributing agency may choose to provide 
donated foods for processing under such an agreement with a multi-State 
processor as well, rather than utilize the State Participation 
Agreement, as described above.
    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 new 
Sec.  250.30(f), and to refer to them as Recipient Processing 
Agreements. We also propose to clarify that, under such agreements, the 
distributing agency may also permit the recipient agency to approve end 
product data schedules or select nationally approved end product data 
schedules, review processor performance reports, and monitor other 
processing activities. All such activities must be performed in 
accordance with the requirements of this part. We propose to clarify 
that a recipient agency may also enter into a Recipient Processing 
Agreement, and perform the activities described above, on behalf of 
other recipient agencies, in accordance with an agreement between the 
parties (such as in a school cooperative, or co-op). We propose to 
include the requirement in current Sec.  250.30(l) that the 
distributing agency approve all Recipient 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 new 
Sec.  250.30(g), but to clarify that

[[Page 50256]]

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)(4)(xvi), a processor may not assign the 
processing agreement, or subcontract with another entity, to perform 
any aspect of processing without the written consent of the 
distributing agency and the contracting agency. We propose to clarify, 
in the new 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 consent as 
part of its State Participation Agreement with the processor.
    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 new Sec.  250.30(i), we propose to 
revise this requirement by permitting all agreements between a 
distributing, subdistributing, or recipient agency and a processor to 
be up to five years in duration. This proposal would permit the 
appropriate agency to determine the length of agreement that would be 
to its best advantage, within the five-year limitation, and would 
reduce the time and labor burden imposed on such agencies. We propose 
to make National Processing Agreements permanent. We propose to 
indicate that amendments to any agreements may be made as needed, with 
the concurrence of the parties to the agreement, and that such 
amendments will be effective for the duration of the agreement, unless 
otherwise indicated.
    We propose to remove the following requirements or statements in 
current Sec.  250.30 relating to processing agreements, as they are 
overly restrictive, or simply unnecessary:
     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)(2) that the 
agreement be prepared and reviewed by State legal staff to ensure 
conformance with Federal regulations.
     The statement in current Sec.  250.30(c)(3) indicating 
which official in the processing enterprise must sign the agreement.
     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 the FNS Regional Office.
     The requirement in current Sec.  250.30(q) with respect to 
FNS reviews of processing agreements or reports, and FNS actions 
following from such reviews.
     The stipulation in current Sec.  250.30(r) that FNS will 
provide copies of agreements to persons requesting them.
2. Procurement Requirements, Sec.  250.31
    The requirements for the procurement of goods and services under 
Federal grants are described in 7 CFR Parts 3016 and 3019. 7 CFR Part 
3016 contains the Department's regulations establishing uniform 
administrative requirements for Federal grants and cooperative 
agreements and subawards to State, local, and Indian tribal 
governments; 7 CFR Part 3019 contains the Department's regulations 
establishing uniform administrative requirements for Federal grants and 
cooperative agreements awarded to institutions of higher education, 
hospitals, and other nonprofit organizations. In the new Sec.  
250.31(a), we propose to indicate the applicability of these 
requirements to the procurement of processed end products or of other 
processing services relating to donated foods, and to indicate that 
distributing or recipient agencies may use procurement procedures that 
conform to applicable State or local laws, as appropriate, but must 
ensure compliance with the Federal procurement requirements. We propose 
to remove the reference in current Sec.  250.30(c)(1) to procurement 
standards in Attachment O of OMB Circular A-102, as this circular is 
obsolete.
    In accordance with 7 CFR 3016.36 and 3019.44, procurement of goods 
and services may be performed using small purchase procedures if the 
cost of such procurement does not exceed the simplified acquisition 
threshold, as defined in 41 U.S.C. 403(11), which is currently 
$100,000. Under these procedures, price quotations must be obtained 
from several sources. However, if the cost of such procurement exceeds 
this threshold, sealed bids or competitive proposals must be used. In 
the new Sec.  250.31(b), we propose to indicate the method of 
procurement required in accordance with 7 CFR 3016.36 and 3019.44, and 
the simplified acquisition threshold. We indicate that these methods of 
procurement are more fully described in 7 CFR 3016.36 and 3019.44. We 
also propose to clarify that, if the threshold for determining the 
required method of procurement is lower under State or local laws, as 
applicable, then the distributing or recipient agency is obligated to 
comply with those procedures.
    In the new Sec.  250.31(c), we propose to require specific 
information in procurement documents, to assist recipient agencies in 
ensuring that they receive credit for the value of donated foods in 
finished end products. We propose to require that procurement documents 
include the price to be charged for the finished end product or other 
processing service, the method of end product sales that will be 
utilized, the processing agreement value of the donated food in the 
finished end products, and the location for the delivery of the 
finished end products. We propose to remove current requirements for 
the provision of pricing information outside of the procurement 
process, including:
    (1) The requirement in current Sec.  250.30(c)(4)(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)(4)(viii)(B), the processor is required 
to obtain, and furnish to the distributing agency, financial protection 
to protect the value of donated foods prior to their delivery for 
processing, by means of a performance bond, an irrevocable letter of 
credit, or an escrow account. The distributing agency must determine 
the dollar value of the financial protection, based on the quantity of 
donated foods for which the processor is accountable. In the new 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. However, we propose to 
require that a multi-State processor provide the performance bond or 
irrevocable letter of credit to FNS, in accordance with its National 
Processing Agreement. We propose to clarify that the amount of the 
performance bond or letter of credit must be sufficient to cover the

[[Page 50257]]

maximum value of raw or processed donated foods that the processor is 
expected to maintain in inventory at any give time, which is determined 
by the distributing agency or by FNS, as appropriate.
    In the new Sec.  250.32(b), we propose to indicate the conditions 
under which the distributing agency must call in the performance bond 
or letter of credit. We also propose to indicate that FNS will call in 
the performance bond or letter of credit under the same conditions, and 
will ensure that any monies recovered are reimbursed to distributing 
agencies for losses of entitlement foods.
4. Processing Yields of Donated Foods, Sec.  250.33
    In current Sec.  250.30(c)(4), the processor must submit, as part 
of the agreement approval, information regarding the production of an 
end product to ensure that the distributing or recipient agency, as 
appropriate, receives the benefit of the donated food processed. This 
information, which is submitted in a format called the end product data 
schedule, must include the following:
     A description of the end product.
     The types and quantities of donated foods and other 
ingredients needed to produce a specific quantity of end product.
     The yield factor for the donated food.
     The contract value of the donated food.
     Any pricing information in addition to the charge for the 
end product or fee-for-service.
    In the new 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 factor. In the new Sec.  250.33(a), 
we propose to require submission of the currently required information 
on the end product data schedule, with the exception of the price 
charged for the end product or other pricing information, and the 
contract value of the donated food. As described above, pricing 
information must be included in the procurement of end products or 
other processing services relating to donated foods. Inclusion of such 
information on end product data schedules may be misleading, as it may 
lead some recipient agencies to conclude that procurement has been 
performed by the distributing agency under its State Processing 
Agreement or State Participation Agreement. Prices currently included 
on end product data schedules generally reflect the highest price that 
a processor will charge for the finished end product.
    We also propose to require inclusion of the processing yield of 
donated food, which may be expressed as the quantity of donated food 
(e.g., lbs. or cases) needed to produce a specific quantity of end 
product, or as the percentage of donated food returned in the finished 
end product. We propose to retain the requirement that end product data 
schedules be approved by the distributing agency under State Processing 
Agreements. We propose to clarify that, for donated foods processed 
under guaranteed return or standard yield, the end product data 
schedules must also be approved by the Department. We propose to 
require that, under National Processing Agreements, end product data 
schedules be approved by the Department. Lastly, we propose to clarify 
that an end product data schedule must be submitted, and approved, for 
each new end product that a processor wishes to provide, or for a 
previously approved end product in which the ingredients or other 
pertinent information have been altered.
    In new Sec.  250.33(b) through (e), we propose to describe the 
several different processing yields of donated foods that may be 
approved in end product data schedules. In current Sec.  
250.30(c)(4)(ii), the processor must meet a 100 percent yield in the 
processing of all substitutable donated foods (i.e., all donated foods 
except beef, pork, and poultry). Under 100 percent yield, the processor 
must ensure that 100 percent of the raw donated food is returned in the 
finished end product. Production loss of donated food must be accounted 
for by replacement with commercially purchased food of the same generic 
identity, of U.S. origin, and of equal or better quality than the 
donated food. To demonstrate this, the processor must report reductions 
in donated food inventories on performance reports in the amount of 
donated food contained in the finished end product rather than the 
amount that went into production. We propose to include the current 100 
percent yield requirement in the new Sec.  250.33(b), and to clarify 
that this processing yield is required for all donated foods except 
beef, pork, and poultry. We propose to indicate that FNS may make 
exceptions to the 100 percent yield requirement, on a case-by-case 
basis, if a processor experiences a significant manufacturing loss.
    Processing of donated foods such as beef, pork, and poultry, 
invariably results in significant loss of product, such as the bones in 
chicken. Hence, the processing yield must take such losses into 
account, in the same manner that the processing of commercial product 
accounts for such losses. Currently, the three processing yields 
approved in end product data schedules to account for such losses 
include guaranteed yield, guaranteed minimum yield, and standard yield. 
We propose to describe these processing yields in the following 
sections.
    Under guaranteed yield or return, the processor must ensure that a 
specific quantity of end product will be produced from the specific 
quantity of donated food put into production, as determined by the 
parties to the processing agreement, and, for State Processing 
Agreements, approved by the Department. The guaranteed yield must be 
indicated on the end product data schedule. We propose to describe 
guaranteed yield in the new Sec.  250.33(c).
    Under guaranteed minimum yield or return, the processor must ensure 
that a specific minimum quantity of end product will be produced from 
the specific quantity of donated food in a production run. If a larger 
quantity of end product than the guaranteed minimum is produced, the 
processor must provide the full quantity to the appropriate agency, 
which must pay the processor for the additional end products produced. 
We propose to describe guaranteed minimum yield in the new Sec.  
250.33(d).
    Under standard yield, the processor must ensure that a specific 
quantity of end product, as determined by the Department, will be 
produced from a specific quantity of donated food. The established 
standard yield is higher than the average yield under normal commercial 
production, and serves to reward those processors that can process 
donated foods most efficiently. Like guaranteed yield, standard yield 
ensures that the recipient agency will receive a specific quantity of 
end product, which helps to ensure that it can meet its food service 
needs. It also avoids the paperwork and review needed to ensure that 
guaranteed minimum yield is met. We propose to describe standard yield 
in the new Sec.  250.33(e).
    In the new Sec.  250.33(f), we propose to require that the 
processor compensate the distributing or recipient agency, as 
appropriate, for the loss of donated foods, or for commercially 
purchased foods substituted for donated foods. Loss of donated foods 
may result for a number of reasons, including the processor's failure 
to meet the required processing yield, as described above, or from 
spoilage or damage of donated foods in storage, or improper 
distribution of end products. In order to compensate for such losses of 
donated

[[Page 50258]]

foods, we propose to require that the processor:
    (1) Replace the lost donated food or commercial substitute with 
commercially purchased food of the same generic identity, of U.S. 
origin, and of equal or better quality than the donated food; or
    (2) Pay the distributing or recipient agency, as appropriate, for 
the replacement value of the donated food or commercial substitute.
    Processing of donated foods may sometimes result in finished end 
products that are wholesome, but do not meet the specifications 
required for use in the recipient agency's food service. As this is 
considered production loss, the processor must provide compensation for 
the donated foods processed into such end products. In normal business 
practice, such products are usually returned to production for 
processing into end products that meet required specifications. These 
are often called rework products. In the new Sec.  250.33(g), we 
propose to require that the processor compensate the distributing or 
recipient agency, as appropriate, for such donated foods, or for 
commercially purchased foods substituted for donated foods, by 
returning the end products to production for processing into end 
products that meet the required specifications. However, we also 
propose to permit the processor to make such compensation by paying the 
distributing or recipient agency, as appropriate, for the replacement 
value of the donated food or commercial substitute in the end products, 
and retaining such end products for its own use. This option would not, 
however, be permitted under guaranteed return or standard yield.
    In current Sec.  250.30(c)(4)(viii)(D), the processor must credit 
the distributing or recipient agency, as appropriate, for the sale of 
any by-products resulting from the processing of donated foods, or of 
commercially purchased foods substituted for donated foods. Crediting 
must be achieved through reduction of the processing fee, and must be 
in the amount received from such sale, or the market value of the by-
products. However, such crediting is not required under guaranteed 
return or standard yield. We propose to include this requirement in the 
new Sec.  250.33(h), but propose to require crediting through invoice 
reductions, or another means of crediting. We also propose to clarify 
that the processor must credit the appropriate agency for the net value 
received from the sale of by-products, after subtraction of any 
documented expenses incurred in preparing the by-product for sale. We 
propose to remove the requirement in current Sec.  
250.30(c)(4)(viii)(D) that the processor credit the distributing or 
recipient agency for the sale of donated food containers.
    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 new Sec.  250.33(i).
5. Substitution of Donated Foods, Sec.  250.34
    We propose to include requirements for the substitution of donated 
foods in the new 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. 
Substitution of donated poultry is permitted with some limitations in 
accordance with a processor's approved plan. Substitution of donated 
beef and pork is not permitted under the regulations.
    As previously mentioned in the preamble, the Department has waived 
current regulations, since 2001, to conduct a demonstration project 
that has permitted selected processors to substitute commercially 
purchased beef and pork for donated beef and pork, in accordance with 
an approved plan. Substitution must be with commercial beef and pork of 
U.S. origin, a