Substitution of USDA Foods in Advance of Purchase

This Management Bulletin (MB) provides guidance on the substitution of U.S. Department of Agriculture (USDA) Foods in advance of USDA purchase and how to accurately report negative inventories at USDA Foods processors.

In accordance with Title 7, Code of Federal Regulations (7 CFR) Section 250.30 (f) [Note: preceding citation is no longer valid, it has been replaced by 250.34 (a)], in most cases a processor may substitute USDA Foods with commercial foods that are of U.S. origin and of equal or better quality than the USDA Foods. Substitution promotes efficient business operations at processors and allows for end products to be provided to recipient agencies (RAs) in a timely manner. Substitution of USDA Foods usually occurs after the USDA has purchased and delivered the USDA Foods to the processor. However, substitution may occur after the USDA has purchased the food, but before the delivery occurs. In both cases, the processor may sell commercial products or USDA Foods end products to any customer if the value of the USDA Foods is passed through to eligible RAs.

When a processor sells commercial products to RAs with the USDA Foods value pass through before the USDA purchases the USDA Foods, this is referred to as “front loading”. This is not specifically prohibited in 7 CFR Part 250; however, it is not recommended because the USDA cannot guarantee the purchase of any USDA Foods. If a processor chooses to front load, they assume all risk and financial liability if the USDA is not able to purchase the USDA Foods.

Monthly Performance Reports and Negative Inventories

When a processor or distributor sells a USDA Foods end product to an RA before the processor receives the USDA Foods, the processor must report the inventory drawdown from these end products as “negative inventory” on Monthly Performance Reports (MPRs). Negative inventory must be reported even if the USDA has already purchased the food. The actual inventory level must be reported by the processor on the MPR following receipt of the USDA Foods at the processor’s facility.

Processor and Distributor Responsibilities

It is important for processors to work closely with distributors to ensure inventory levels are reported correctly. The processor must inform the distributor of inventory levels and the timing of substitution for USDA Foods. The distributor must provide notification of the sale of end products in a timely manner. Close collaboration between the processor and distributor will help to avoid any disputes arising from the sale of end products to RAs before receipt of USDA Foods.

State Responsibilities

The Food Distribution Program (FDP) will make note of any negative inventories reported on processor MPRs. If negative inventories are reported, the FDP will see if the processor will be receiving deliveries of USDA Foods later that school year or if RAs plan to request foods be sent to that processor. The FDP will notify the processor and the RA if USDA Foods cannot be shipped to the processor that school year.

Recipient Agency Procurement of End Products

When soliciting bids from processors or distributors RAs may include, as a provision of procurement, that USDA Foods end products be delivered early in the school year. RAs should be aware that this type of provision may limit bids because some processors or distributors may not be willing to provide USDA Foods end products before the USDA Foods have been purchased by the USDA or received by the processor. There is no guarantee that the USDA will be able to purchase foods so this type of provision potentially puts the processor at risk of the financial liability. Additionally, the RA may be held liable if it does not order sufficient quantities of USDA Foods to allow the processor to balance inventories. The RA may also be held liable if it cancels orders before delivery to the processor occurs.

Food Distribution Program Guidance for Processors and Recipient Agencies

The FDP will provide guidance to processors and RAs to ensure compliance with regulations, policies, and procedures relating to substitution, inventory, and other aspects of the processing of USDA Foods.

If you have any questions regarding this MB, please contact the Food Distribution Program Office by phone at 916‑323-0865 or by email at fooddistribution@cde.ca.gov.