Management of USDA Foods Inventories at Processors

On April 2, 2019, the U.S. Department of Agriculture (USDA) issued a revised FD-064 policy memorandum. FD-064 (revised) clarifies the established six-month inventory limit, and elaborates on requirements of the Food Distribution Program (FDP), recipient agencies (RA), and processors in managing USDA Foods inventories at processors.

This management bulletin (MB) supersedes MB USDA-FDP-03-2012 (dated May 2012) and provides guidance on reducing excess inventories and requires:

• Processors to submit a detailed written justification request if inventory on hand exceeds the established six-month inventory limit
• USDA Foods paper transfers of bulk poultry be of proportional white and dark pounds; transfers of excess only white or excess only dark pounds should not occur
• USDA approval of state to state and processor to processor transfers   

The six-month inventory limit established by Title 7, Code of Federal Regulations (7 CFR), Section 250.35(d), is applicable to statewide inventories of USDA Foods at processors and also to individual RA USDA Foods inventories at processors. USDA Foods inventories at processors must be at acceptable levels to ensure efficient distribution and use of USDA Foods. When RAs divert USDA Foods to processors and do not use the processed USDA Foods end products, RAs do not benefit from the entitlement dollars they spent. In addition, processors may incur increased storage costs, resulting in higher prices for end products.

Responsibilities of the RAs

An RA is responsible for planning the usage of their USDA Foods and should only divert USDA Foods to processors in amounts needed to produce the quantity of end products the RA can procure and use during the same school year.

RAs are responsible for using the monthly reports issued by their processors to monitor their USDA Foods inventories. RAs should be aware of inventories that are not being drawn down and work with their processors, brokers, distributors, or the FDP to resolve excess inventory issues. It is important for RAs to work with the FDP and their respective processors to efficiently use all pounds of USDA Foods diverted each school year. Furthermore, RAs need to ensure that they are not storing their USDA Foods with processors for an extended period of time as this can increase storage costs for processors, resulting in higher prices for end products.

Responsibilities of Processors

Processors are responsible for providing data necessary for the FDP and RAs to monitor and address USDA Foods inventory issues. This includes monthly performance reports (MPR) and other usage reports needed to analyze the activity and months on hand of USDA Foods.

Processors are responsible and required to submit to the FDP a written justification to request the approval of higher inventories as a part of their December MPRs and prior to or in anticipation of inventories over the six-month limit. The FDP may take actions necessary to manage and reduce such inventories as needed. The detailed written justification request for the need for higher inventories must include the following:

• A specific plan, including a timeline, for the drawdown of USDA Foods
• Promotions of end products or sales expansion
• Demonstrate the processor’s ability to efficiently store and process such quantity of USDA Foods  

Responsibilities of the FDP

The FDP is responsible for monitoring the processors’ inventories that includes unprocessed and processed end products of USDA Foods. The FDP will analyze MPRs received from processors to ensure compliance with the six-month inventory limit. The FDP will work with RAs and processors to ensure that the efficient ordering and processing of USDA Foods is occurring, and timely sales of end products are being made.

If the FDP determines that an RA’s USDA Foods inventories are not being drawn down, the cause will be determined and FDP will work with both the RA and the processor to resolve the situation.

Applying the Six-month Inventory Limit

The six-month inventory limit is applicable to statewide inventories of USDA Foods at processors and also to individual RA USDA Foods inventories at processors. The RA needs to work with their processor(s) to determine their allowable six-month inventory limit for each USDA Foods diverted. This allowable six-month inventory limit will apply to USDA Foods inventories for the school year beginning July 1.

To calculate an allowable six-month inventory level, a processor’s prior year average monthly usage is used. The steps to complete the calculation are: 

• Obtaining the year-to-date usage that is reported on a processor’s previous year June MPR (for the reporting period ending the previous June 30)  
• Dividing the year-to-date usage by 10 months (the length of most school years)
• Multiplying by six

End of School Year Action

If, at the end of a school year, a processor exceeds the six-month inventory limit or the limit approved by the FDP (through the written justification), the FDP is required to take further action to resolve the high inventory levels. The FDP may:

• Allow the processor to carry over the excess inventory into the next school year, if it is determined that the processor can efficiently store and process the large quantities of USDA Foods. This would only be allowable if the excess inventory is not due to systemic mismanagement of processor inventory.
  
  
• Direct the processor to transfer the excess inventory to other RAs who need additional pounds or to another state in accordance with 7 CFR, Section 250.12(e).
  
  
• Require the processor to pay for the USDA Foods (at the replacement value of the USDA Foods) that are above the allowable six-month inventory limit.

Transfers to Another State

The USDA allows the FDP to transfer USDA Foods to another state distributing agency (SDA) using the same processor. If this transfer occurs in the same school year that the USDA Foods were delivered to the processor, entitlement credit may be transferred from the receiving SDA to the donating SDA. Such entitlement credit must be acceptable to both SDAs and must be approved and applied by the USDA. Even if entitlement credit is not to be applied, the USDA must approve all state to state transfers. Processors should not report USDA Foods transfers on monthly performance reports until the transfers (physical or paper) are completed.

Transfers to Another Processor

The FDP may reduce excess USDA Foods inventories at a processor by transferring USDA Foods to another approved processor. The FDP must ensure that the receiving processor can efficiently use the USDA Foods. The transfer may be a paper transfer if this is acceptable to all parties. Once such a transfer is made, the FDP may not approve a second transfer of the USDA Foods to a different processor. For a paper transfer, the donating processor will write a check to the receiving processor. The value of the USDA Foods used in paper transfers must be replacement value, as defined in 7 CFR, Section 250.2, multiplied by the number of pounds of USDA Foods being transferred. And as with state to state transfers, USDA approval is required for processor to processor transfers. Processors should not report USDA Foods transfers on monthly performance reports until the transfers (physical or paper) are completed.

Paper transfers of bulk poultry must be proportional white and dark pounds based on each processor’s ratio for the whole bird. The donating processor will use their white to dark ratio to initiate the transfer. The receiving processor will bank the pounds based on their approved white to dark ratio. Paper transfers of only white or only dark excess pounds for the whole bird are not allowed.

Since USDA Foods bulk beef and pork have unique purchase specifications, physical transfers for these foods must typically be the USDA beef and pork, as purchased by USDA (no substitutions). The only time a physical transfer for substituted bulk beef and pork may be allowed is between two processors that are both permitted to substitute beef and pork in accordance with 7 CFR, Section 250.34, and their respective processing agreements. Paper transfers of donated beef and pork products may only occur if the receiving processor ensures that commercial replacement of beef or pork is acquired in accordance with 7 CFR, Section 250.34, and is certified to be:

• Of the same generic identity
• Of U.S. origin
• And of equal or better quality in all USDA purchase specifications

Physical transfers of the boneless beef combo are prohibited because it is a fresh product that must be processed within five days of initial production. With physical transfers, the receiving processor is responsible for transportation expenses.

Rejection of RA USDA Foods Orders

In accordance with 7 CFR, Section 250.58(b), an RA may receive less than a school year’s commodity offer value of USDA Foods if the FDP determines, in consultation with the RA and the processor, that the RA cannot efficiently use such value. If the FDP makes this determination, the FDP may reject any of the RA’s additional orders of those USDA Foods for delivery to processors. The FDP may also reallocate the RA’s current USDA Foods inventory at a processor to other RAs that may use the USDA Foods or to an Excess State Account at the processor for later reallocation.

Conclusion

Reallocations of USDA Foods to other RAs, or transfers to other SDAs using the same processor, are preferable over transfers to another processor, since they do not involve a physical transfer or payment from one processor to another. Payment by the processor to the FDP for the value of excess USDA Foods inventories should only be used if other inventory reduction options are not feasible. RAs and processors need to closely monitor their USDA Foods inventories to make sure they do not exceed the six-month limit. The USDA reserves the right to delay or cancel requested trucks, or require the transfer of excess USDA Foods to another processor or SDA if the SDA’s, processor’s, or RA’s USDA Foods inventories are not at acceptable levels.

Contact

If you have any questions regarding this subject, please contact the Food Distribution Program Office by email at FoodDistribution@cde.ca.gov.