USDA Final Rule Regarding Revisions

This management bulletin highlights key changes made to Title 7, Code of Federal Regulations (7 CFR), Part 250, which affects the requirements for the processing of U.S. Department of Agriculture (USDA) Foods. These changes became effective July 2, 2018, and were published by the USDA in the final rule titled, Revisions and Clarifications in Requirements for the Processing of Donated Foods. The published final rule can be found on the Federal Register Revisions and Clarifications in Requirements for the Processing of Donated Foods web page at https://www.federalregister.gov/documents/2018/05/01/2018-09168/revisions-and-clarifications-in-requirements-for-the-processing-of-donated-foods.

Background

The USDA published the Final Rule for 7 CFR, Section 250.30, on May 1, 2018. This rule revises and clarifies regulations to incorporate successful processing options tested in demonstration projects, ensures accountability for USDA Foods provided for processing, increases program efficiency and integrity, and supports vendor and state operations. The rule also revises regulatory provisions in plain language to make them easier to read and understand.

Key Changes for Recipient Agencies and Processors

The USDA has created a side-by-side comparison chart that provides a detailed summary of all changes made to 7 CFR, Part 250. The processing rule side-by-side document is attached to this management bulletin.

The following sections are considered key changes that pertain to USDA Foods processors and recipient agencies (RA). In addition to reviewing these selected citations, the Food Distribution Program (FDP) strongly encourages all participants to read the preamble and regulatory text in its entirety. The following citations are in sequential order:

Definition of backhauling, 7 CFR, Section 250.2: Adds a definition for backhauling to mean the delivery of USDA Foods to a processor for processing from a distributing or RA’s storage facility. This definition affects processors that receive or pick up USDA Foods directly from a state distribution center. These processors are subject to requirements established in 7 CFR, Section 250.34(b), referenced below.

Transfer of title, 7 CFR, Section 250.11(e): Clarifies that the title to USDA Foods transfers to an RA upon acceptance of product at time and place of delivery. When an RA has contracted with a distributor to act as an authorized agent (receiver of USDA Foods), title to end products containing USDA Foods transfers to the RA upon delivery and acceptance by contracted distributor. RAs should ensure a distributor contract include liabilities for loss of USDA Foods at the distributor language.

Repackaging of donated foods, 7 CFR, Section 250.30(a): Clarifies that the use of a commercial facility to repackage or use USDA Foods in the preparation of meals is considered processing and subject to all processing requirements in 7 CFR, Part 250. Commercial entities such as food service management companies and meal vendors are considered processors as defined in 7 CFR, Section 250.2.

State Participation Agreement (SPA) for multistate processors, 7 CFR, Section 250.30(d): Adds additional criteria for the FDP to use in the selection of processors it enters into agreements with. At minimum, multistate processors will be approved to participate in California based on: (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, integrity, and capacity to meet regulatory requirements.

Agreements between processors and distributors, 7 CFR, Section 250.30(i): Adds the requirement for processors providing end products containing USDA Foods to a distributor to have a written agreement with the distributor. This agreement, at minimum, must reference: (1) financial liability (who must pay for food loss) for the replacement value of USDA Foods; (2) monthly end product sales reporting frequency (at least monthly); (3) requirements listed under 7 CFR, Section 250.11 (delivery and receipt of shipment requirements); and (4) the applicable value pass through system to ensure that the value of donated foods and finished end products are properly credited to RAs.

Duration of agreements (processors), 7 CFR, Section 250.30(j): Allows multistate processor SPAs to be permanent and clarifies that in-state processing agreements may be valid for up to five years in duration. The FDP still requires annual certifications from all processors in order to obtain necessary school year information.

Required information in procurement documents, 7 CFR, Section 250.31(b): Adds a requirement that mandates specific documentation in RA solicitations for processed end products containing USDA Foods. All applicable procurement documents must include: (1) the price for the end product or other processing service, (2) the method that will be used for end product sales and assurance that crediting for USDA Foods will be completed, (3) the values of USDA Foods in the end product, and (4) the location for the delivery of the end product.

Processor End Product Data Schedule (EPDS), 7 CFR, Section 250.33(a): Removes pricing information from the EPDS and strengthens the information requirements. The EPDS must include: (1) a description of each end product, (2) the types and quantities of USDA Foods used, (3) the types and quantities of other ingredients used, (4) the quantity of end product produced, and (5) the processing yield of USDA Foods expressed as the quantity (pounds or cases) 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.

Substitution of commercially purchased foods for donated foods, 7 CFR, Section 250.34(a): Allows the processor to substitute commercially purchased foods for any USDA Foods that are delivered to the processor 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 USDA Foods. Commercially purchased beef, pork, or poultry must meet the same specifications as USDA Foods, including inspection, grading, testing, and humane handling standards and must be approved by the USDA 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. Commercially purchased food substituted for USDA Foods must meet the same processing yield requirements as USDA Foods.

Prohibition against substitution and other requirements for backhauled USDA Foods, 7 CFR, Section 250.34(b): Prohibits substitution or commingling of all USDA Foods that are backhauled from an RA or FDP storage facility. The processor must process backhauled USDA Foods into end products for sale and delivery to the RA that provided them, and not to any other RA. RAs must purchase end products using USDA Foods backhauled to their contracted processor. The processor may not provide payment for backhauled USDA Foods in lieu of processing. Backhauling is now defined as the delivery of USDA Foods to a processor for processing from the FDP or RA’s storage facility.

Use of substituted USDA Foods (processors), 7 CFR, Section 250.34(e): Revised to permit processors to use any substituted USDA Foods (excluding backhauled items) and removes the stipulation that the title to substituted USDA Foods passes to the processor upon the initiation of processing of the end product with the commercial substitute.

Storage and quality control (processors), 7 CFR, Section 250.35(a): Clarifies the requirement for processors to maintain documentation verifying the effectiveness of its quality control system to ensure the safe and effective storage of USDA Foods. This also specifies that documentation must be provided upon request.

Limitation on USDA Foods inventories, 7 CFR, Section 250.35(d): Reiterates that inventories of USDA Foods at a processor may not exceed a six-month supply, based on an average amount of USDA Foods used, unless a written justification submitted by the processor has been approved by the FDP. This also adds that the FDP shall not send any USDA Foods to a processor that reported no sales activity during the previous year unless documentation is submitted by the processor, which outlines specific plans for product promotion or sales expansion. Lastly, this adds authority for the USDA to intervene and transfer inventory to another state or processor to ensure use prior to the end of the school year, when inventories are considered excessive or grossly exceeding the established protection.

Reconciliation of excess USDA Foods (Processor), 7 CFR, Section 250.35(e): Clarifies that processors may carry over inventory in excess of a six-month supply to the following school year if the FDP determines that the processor may efficiently store and process such quantities. The FDP will make these determinations and notify each processor after the assessment of their final school year report. It also provides the FDP authority to direct the processor to transfer such excess inventory to another RA or state in accordance with 7 CFR, Section 250.12(e). If actions are not considered practical, the FDP must require the processor to pay for the USDA Foods held in excess of allowed levels at the fair market value.

Indirect discount—net off invoice (value pass through), 7 CFR, Section 250.36(d): Formalizes indirect discount, also known as net off invoice, and clarifies that the distributor is required to notify the processor of all applicable sales at least monthly, through automated sales reports or other electronic or written submission (refund applications are no longer required). The processor then compensates the distributor for the discount provided for the value of the USDA Foods in its sale of end products. RAs should closely monitor invoices to ensure correct discounts are applied.

Fee for service (value pass through), 7 CFR, Section 250.36(e): Formalizes fee for service and clarifies that the processor must require the distributor to notify them of all applicable sales at least monthly through automated sales reports, email, or other electronic or written submission.

Performance reports (processors), 7 CFR, Section 250.37(a): Clarifies that performance reports must be submitted on a monthly basis no later than 30 days after the end of the reporting period. The annual reconciliation report is replaced by the annual June report and is due 30 days after the end of the reporting period. The performance report must include the following with year-to-date totals: (1) a list of all RAs purchasing end products, (2) the quantity of USDA Foods in inventory at the beginning of the reporting period, (3) the quantity of USDA Foods received, (4) the quantity of USDA Foods transferred to or from another entity, (5) the quantity of USDA Foods losses, (6) the quantity of end products delivered to each eligible RA, (7) the quantity of USDA Foods remaining at the end of the reporting period, (8) a certification statement that sufficient USDA Foods are in inventory or on order to account for the quantities needed for production of end products, (9) grading certificates (if applicable), and (10) other supporting documentation that the FDP may require.

Recordkeeping requirements for processors, 7 CFR, Section 250.37(d): Adds documentation retention requirements for participating processors. Processor must maintain: (1) end product data schedules and summary end product data schedules (as applicable); (2) receipt of USDA 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 USDA 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 USDA Foods, including grading certificates (as applicable); (8) waivers of grading requirements (as applicable); and (9) other reports that the FDP may require.

Recordkeeping requirements for RAs, 7 CFR, Section 250.37(f): Adds documentation retention requirements for participating RAs that must maintain: (1) the receipt of end products purchased from processors or distributors, (2) crediting for the value of USDA Foods contained in end products, (3) RA processing agreements (not applicable), and (4) procurement documents (as applicable). Please note that no California RAs hold processing agreements with processors as referenced in this section.

General Resources

To better understand the USDA Foods processing rule changes, the FDP recommends viewing the USDA training webinar, The Processing Rule: A General Overview on the USDA Food and Nutrition Services Web page at https://www.fns.usda.gov/fdd/processing-rule-general-overview.

Contact Information

If you have any questions regarding this subject, please contact Amy Bell, Lead Policy Coordinator, Food Distribution Program, by phone at 916-322-5051 or by email at abell@cde.ca.gov.