[Code of Federal Regulations]
[Title 7 Volume 4]
[Revised as of January 1, 2001]
From the U.S. Government Printing Office via GPO Access
[CITE: 7CFR250.30]

[Page 430-440]
 
                          TITLE 7--AGRICULTURE
 
    CHAPTER II--FOOD AND NUTRITION SERVICE, DEPARTMENT OF AGRICULTURE
 
PART 250--DONATION OF FOODS FOR USE IN THE UNITED STATES, ITS TERRITORIES AND POSSESSIONS AND AREAS UNDER ITS JURISDICTION--Table of Contents
 
           Subpart C--Processing and Labeling of Donated Foods
 
Sec. 250.30  State processing of donated foods.


    (a) General. This section sets forth the terms and conditions under 
which distributing agencies, subdistributing agencies, or recipient 
agencies may enter into contracts for the processing of donated foods 
and prescribes the minimum requirements to be included in such 
contracts.
    (b) Permissible contractual arrangements. (1) A distributing agency, 
subdistributing agency, or recipient agency may contract for processing, 
pay the processing fee, and deliver the end products to eligible 
recipient agencies through its own distribution system. Distributing 
agencies shall assure that the acceptability of processed end products 
is tested with recipient agencies eligible to receive them prior to 
entering into a processing contract and shall develop a system for 
monitoring product acceptability. Distributing agencies may exempt end 
products from testing if they have been used previously, have been 
determined by the distributing agency to be acceptable by recipient 
agencies, and have had no changes in specifications.

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    (2) A distributing agency or subdistributing agency may contract for 
processing on behalf of one or more recipient agencies. All recipient 
agencies eligible to receive the donated foods to be processed may 
receive end products made from those foods and produced under such 
processing contracts by virtue of the distributing agency--recipient 
agency agreement required by Sec. 250.12(b). Under this arrangement and 
subject to the approval of the distributing agency:
    (i) Processors shall utilize either a discount or a refund system as 
defined in Sec. 250.3 when they sell end products directly to recipient 
agencies, or
    (ii) When selling end products through a distributor, such sales 
shall be in accordance with paragraph (e) of this section.
    (3) Distributing agencies shall permit subdistributing agencies and 
recipient agencies to enter into processing contracts with a processor 
under arrangements similar to those described in paragraph (b) (1) or 
(2) of this section.
    (c) Requirements for processing contracts. (1) Contracts with 
processors shall be in a standard written form and shall be reviewed by 
the appropriate FNSRO. Processing contracts shall terminate on June 30 
of each year. However, processing contracts may give contracting 
agencies the option of extending contracts for two 1-year periods, 
provided that any changed information must be updated before any 
contract extension is granted, including the information in paragraphs 
(c)(3), (c)(4)(ii), and (c)(4)(viii)(B) of this section. The processor 
must have performed to the satisfaction of the contracting agency during 
the previous contract year, submitted all required reports and any 
corrections to such reports up to the time that contract extension 
occurs, and submitted its certified public accountant report as required 
under paragraph (c)(4)(xi) of this section before the contract may be 
extended. Distributing agencies shall develop criteria for use in 
evaluating and selecting processing contracts. The selection criteria 
shall be used in selecting or rejecting processors in a manner that 
ensures equitable treatment of processors. The selection criteria shall, 
at a minimum, include:
    (i) The nutritional contribution which the end product will provide;
    (ii) The marketability of the end product;
    (iii) The distribution method which the processor intends to 
utilize;
    (iv) Price and yield schedule data;
    (v) Any applicable labeling requirements; and
    (vi) The ability of the processor to meet the terms and conditions 
set forth in the regulations.

These criteria will be reviewed by the appropriate FNSRO during the 
management evaluation review of the distributing agency. Distributing 
agencies and subdistributing agencies which enter into contracts on 
behalf of recipient agencies but which do not limit the types of end 
products which can be sold or the number of processors which can sell 
end products within the State are not required to follow the selection 
criteria. In addition to utilizing these selection criteria, when a 
contracting agency enters into a contract both for the processing of 
donated food and the purchase of the end products produced from the 
donated food, the procurement standards set forth in Attachment O to OMB 
Circular A-102 must be followed. Recipient agencies which purchase end 
products produced under Statewide agreements are also required to comply 
with Attachment O of OMB Circular A-102. Contracting agencies shall not 
enter contracts with processors which cannot demonstrate the ability to 
meet the terms and conditions of the regulations and the distributing 
agency agreements; furnish prior to the delivery of any donated foods 
for processing, a performance bond, an irrevocable letter of credit or 
an escrow account in an amount sufficient to protect the contract value 
of donated food on hand and on order; demonstrate the ability to 
distribute end products to eligible recipient agencies; provide a 
satisfactory record of integrity, business ethics and performance and 
provide adequate storage.
    (2) Standard form contracts shall be prepared or reviewed by the 
appropriate State legal staff to assure conformity with the requirements 
of these regulations and of applicable Federal, State and local laws.

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    (3) The contract shall be signed for the processor by the owner, a 
partner, or a corporate officer duly authorized to sign the contract, as 
follows:
    (i) In a sole proprietorship, the owner shall sign the contract;
    (ii) In a partnership, a partner shall sign the contract;
    (iii) In a corporation, a duly authorized corporate officer shall 
sign the contract.
    (4) At a minimum, each processing contract shall include:
    (i) The names and telephone numbers of the contracting agency and 
processor;
    (ii) A description of each end product, the quantity of each donated 
food and the identification of any other ingredient which is needed to 
yield a specific number of units of each end product (except that the 
contracting agency may permit the processor to specify the total 
quantity of any flavorings or seasonings which may be used without 
identifying the ingredients which are, or may be, components of 
flavorings or seasonings), the total weight of all ingredients in the 
batch formula, the yield factor for each donated food, and any pricing 
information provided by the processor in addition to that required in 
paragraph (c)(4)(iii) of this section as requested by the contracting 
agency and a thorough explanation of what this additional pricing 
information represents. The yield factor is the percentage of the 
donated food which must be returned in the end product to be distributed 
to eligible recipient agencies. For substitutable donated foods, at 
least 100 percent of the donated food provided to the processor must be 
physically contained in the end products with no allowable tolerance;
    (iii) The contract value of each donated food to be processed and, 
where processing is to be performed only on a fee-for-service basis as 
defined in Sec. 250.3, the fee-for-service;
    (iv) A provision for:
    (A) Termination of the contract upon thirty days written notice by 
the contracting agency or the processor and
    (B) Immediate termination of the contract when there has been 
noncompliance with its terms and conditions by the contracting agency or 
the processor;
    (v) In the event of contract termination, a provision for 
disposition of donated foods and end products in the processor's 
inventories or payment of funds in accordance with paragraph (j) of this 
section;
    (vi) A provision for inspection and certification during processing, 
where applicable, by the appropriate acceptance service in accordance 
with paragraphs (g) and (h) of this section;
    (vii) A provision that end products containing donated foods that 
are not substitutable under paragraph (f) of this section shall be 
delivered only to eligible recipient agencies and that end products 
containing both substitutable and non-substitutable donated foods may be 
delivered and sold in accordance with the requirements of paragraph (d) 
and (e) of this section;
    (viii) Provisions that the processor shall:
    (A) Fully account for all donated foods delivered into its 
possession by production and delivery to the contracting agency or 
eligible recipient agencies of an appropriate number of units of end 
products meeting the contract specifications, and where end products are 
sold through a distributor, that the processor remains full accountable 
for the donated foods until refunds or any other credits equal to their 
contracted value have been made to eligible recipient agencies in 
accordance with paragraph (k) of this section or to distributing 
agencies in accordance with paragraph (n)(2) of this section;
    (B) Furnish to the contracting agency prior to the delivery of any 
donated foods for processing documentation that a performance supply and 
surety bond from a surety company listed in the most recent U.S. 
Department of Treasury Circular 570, an irrevocable letter of credit or 
an escrow account has been obtained in an amount that is sufficient to 
protect the contract value of all donated foods. Since the distributing 
agency is held liable by FNS for

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any donated foods provided to a processor the distributing agency shall 
determine the dollar value of the performance supply and surety bond, 
irrevocable letter of credit or the escrow account taking into 
consideration the
    (1) Value of donated foods on hand;
    (2) Value of donated foods on order and
    (3) Anticipated usage rate during the contract period;
    (C) Use or dispose of the containers in which donated foods are 
received from the Department in accordance with the instructions of the 
contracting agency;
    (D) Apply as credit against the processing fee or return to the 
contracting agency and identify:
    (1) Any funds received from the sale of containers, and
    (2) The market value or the price received from the sale of any by-
products of donated foods or commercial foods which have been 
substituted for donated foods;
    (E) Substitute donated foods with commercially purchased foods only 
in accordance with paragraph (f) of this section;
    (F) Meet the requirements of paragraph (i) of this section for 
labeling end products;
    (G) Maintain accurate and complete records pertaining to the 
receipt, disposal, and inventory of donated foods in accordance with 
Sec. 250.16;
    (H) Submit processing performance reports in accordance with 
paragraph (m) of this section; and
    (I) Submit annual reconciliation reports and make payments to 
distributing agencies for any inventory remaining at the termination of 
the contract in accordance with paragraph (n)(3) of this section.
    (ix) A provision that approval of the contract by distributing 
agency shall not obligate that agency or the Department to deliver 
donated foods for processing;
    (x) A description of the processor's quality control system and 
assurance that an effective quality control system will be maintained 
for the duration of the contract;
    (xi) In instances when the processor is a multi-State processor as 
defined in Sec. 250.3, a provision that the processor agrees to obtain 
an independent audit by a certified public accountant in accordance with 
Sec. 250.18(b);
    (xii) A requirement that inventory drawdowns shall be limited to the 
actual amount of donated foods contained in the end product. Additional 
commodity required to account for production loss shall be obtained from 
non-donated foods;
    (xiii) A provision that the fee-for-service or value pass-through 
system to be used for the sale of end products to recipient agencies 
shall be described and be consistent with paragraphs (d) and (e) of this 
section.
    (xiv) In instances when the distributing agency has delegated the 
responsibility for sales verification for end products provided by a 
distributor to recipient agencies at a discount, assurance that the 
processor will submit sales verification data to the distributing agency 
in accordance with Sec. 250.30(m)(l); and
    (xv) A provision that the contracting agency shall give the 
processor a list of all recipient agencies eligible to purchase end 
products under the contract and provide updates for any changes which 
occur during the contract period.
    (xvi) A provision that the processor shall not assign the processing 
contract or delegate any aspect of processing under a subcontract or 
other arrangement without the written consent of the contracting agency 
and the distributing agency.
    (xvii) A provision that the processor shall provide pricing 
information summaries and updated pricing information summaries as 
required in paragraphs (d)(3) and (e)(2) of this section.
    (xviii) A provision that the processor shall maintain documentation 
which demonstrates that the level of the processor's commercial 
production has not been reduced, as required in paragraph (f)(1)(iii) of 
this section.
    (d) End products sold by processors. (1) When recipient agencies pay 
the processor for end products, such sales shall be under:
    (i) A refund system as defined in Sec. 250.3 and in accordance with 
paragraph (k) of this section; or
    (ii) A discount system which provides the price of each unit of end 
product

[[Page 434]]

purchased by eligible recipient agencies to be discounted by the stated 
contract value of the donated foods contained therein; or
    (iii) An alternative value pass-through system under which the value 
of the donated food contained in each unit of end product shall be 
passed to the recipient agency and which has been approved by FNS at the 
request of the distributing agency. Any alternative value pass-through 
system approved under this paragraph must comply with the sales 
verification requirements specified in Sec. 250.19(b) of this part, or 
an alternative verification system approved by FNS. The Department 
retains the authority to inspect and review all pertinent records 
including records pertaining to the verification of a statistically 
valid sample of sales. FNS may consider the paperwork and resource 
burden associated with alternative value pass-through systems when 
considering approval and reserves the right to deny the approval of 
systems which are labor-intensive and provide no greater accountability 
than those systems permitted under paragraphs (d) and (e) of this 
section.
    (2) When a processor delivers end products produced under a fee-for-
service contract, the processor shall separately identify on the bill 
for the recipient agency the agreed-upon fee-for-service and any 
delivery costs.
    (3) Processors shall provide pricing information summaries to 
contracting agencies and contracting agencies shall provide this 
information to recipient agencies as soon as possible after contract 
approval. If this pricing information changes during the contract 
period, processors shall provide updated pricing information to the 
contracting agency 30 days prior to the effective date of the change, 
which, in turn, shall provide this updated information to eligible 
recipient agencies.
    (e) End products sold by distributors.
    (1) When a processor transfers end products to a distributor for 
delivery and sale to recipient agencies, such sales shall be under:
    (i) A refund system as defined in Sec. 250.3 and in accordance with 
paragraph (k) of this section; or
    (ii) A hybrid system which provides a refund for the contract value 
of the donated food shall be provided to the distributor in accordance 
with paragraph (k) of this section and the price of each unit of end 
product purchased by eligible recipient agencies through a distributor 
shall be discounted by the contract value of the donated foods contained 
therein; or
    (iii) An alternative value pass-through system under which the 
contract value of the donated food contained in each unit of end product 
shall be passed on to the recipient agency and which has been approved 
by FNS in accordance with paragraph (d)(1)(iii) of this section; or
    (iv) When a processor arranges for delivery of processed end 
products produced under fee-for-service contracts by distributors, the 
products shall be delivered and invoiced using one of the following 
procedures:
    (A) The recipient agency is billed by the processor for the fee-for-
service and the distributor bills the recipient agency for the storage 
and delivery of the end products; or
    (B) The processor arranges for the delivery of end products through 
a distributor on behalf of the recipient agency. In this system, the 
processor's invoice must include both the fee-for-service and the 
distributor's charges as separate, clearly identifiable charges.
    (2) Processors shall provide pricing information summaries to 
contracting agencies and contracting agencies shall provide this 
information to recipient agencies as soon as possible after contract 
approval. If this pricing information changes during the contract 
period, the processor shall provide updated pricing information to the 
contracting agency, which, in turn, shall provide this information to 
the eligible recipient agencies.
    (f) Substitution of donated foods with commercial foods. (1) The 
processing contract may provide for substitution of donated foods as 
defined in Sec. 250.3. If the provision allowing substitution is 
included, the contract shall stipulate that:
    (i) Only butter, cheese, corn grits, cornmeal, flour, macaroni, 
nonfat dry milk, peanut butter, peanut granules, roasted peanuts, rice, 
rolled oats, rolled wheat, shortening, vegetable oil, and spaghetti may 
be substitutable as

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defined in Sec. 250.3 and such other food as FNS specifically approves 
as substitutable under paragraph (f)(4) of this section (substitution of 
meat and poultry items shall not be permitted),
    (ii) All components of commercial foods substituted for those 
donated must be of U.S. origin and be identical or superior in every 
particular of the donated-food specification as evidenced by 
certification performed by, or acceptable to, the applicable Federal 
acceptance service, and
    (iii) Processors shall maintain documentation that they have not 
reduced their level of commercial production because of participation in 
the State processing program.
    (2) Documentation must be maintained by both parties in accordance 
with Sec. 250.16. Where commercial food is authorized to be substituted 
for any donated food specifically listed in paragraph (f)(1)(i) of this 
section, the processor shall maintain records to substantiate that it 
continues to acquire on the commercial market sufficient purchases of 
substitutable food for commercial production and any amounts necessary 
to meet the 100 percent yield requirement. When there is substitution, 
the donated foods shall be used by the processor and shall not otherwise 
be sold or disposed of in bulk form. The applicable Federal acceptance 
service shall, upon request by the Department, the contracting agency or 
the distributing agency determine if the quality analysis meets the 
requirements set forth by the Agricultural Stabilization and 
Conservation Service (ASCS) in the original inspection of donated foods 
and, in the case of concentrated skim milk replacing donated nonfat dry 
milk, determine if the concentrated skim milk contains the amount of 
milk solids as specified in the contract. When donated foods are 
nonsubstitutable, the applicable Federal acceptance service shall ensure 
against unauthorized substitutions, and verify that quantities of 
donated foods used are as specified in the contract.
    (3) When concentrated skim milk is used to replace donated nonfat 
dry milk, the contract shall also specify (in addition to the 
requirements in paragraph (c) of this section):
    (i) The percent of milk solids that, at a minimum, must be contained 
in the concentrated skim milk;
    (ii) The weight ratio of concentrated skim milk to donated nonfat 
dry milk;
    (A) The weight ratio is the weight of concentrated skim milk which 
equals one pound of donated nonfat dry milk, based on milk solids;
    (B) In calculating this weight, nonfat dry milk shall be considered 
as containing 96.5 percent milk solids;
    (C) If more than one concentration of concentrated skim milk is to 
be used, a separate weight ratio must be specified for each 
concentration;
    (iii) The processor's method of verifying that the milk solids 
content of the concentrated skim milk is as stated in the contract;
    (iv) A requirement that inventory drawdowns of donated nonfat dry 
milk shall be limited to an amount equal to the amount of concentrated 
skim milk, based on the weight ratio, used to produce the end product;
    (v) A requirement that the contract value of donated food for a 
given amount of concentrated skim milk used to produce an end product is 
the value of the equivalent amount of nonfat dry milk, based on the 
weight ratio of the two foods;
    (vi) A requirement that the concentrated skim milk shall be produced 
in a USDA approved plant or in a plant approved by the appropriate 
regulatory authority for the processing of Grade A milk products; and
    (vii) A requirement that documentation sufficient to substantiate 
compliance with the contract provisions shall be maintained in 
accordance with Sec. 250.16(a)(4).
    (4) Processor may request approval to substitute commercial foods 
for donated foods not specifically listed in paragraph (f)(1)(i) of this 
section by submitting such request to FNS in writing and satisfying all 
requirements of paragraphs (f)(1)(ii) and (iii) of this section. FNS 
will notify the processor in writing of authorization to substitute 
commercial foods for donated foods not listed in paragraph (f)(1)(i) of 
this section and such authorization shall apply for the duration of all 
current contracts entered into by the processor pursuant to this 
section.

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    (5) Title to the substituted food shall transfer to the contracting 
agency upon the initiation of the processing of the end product 
containing the substituted food. Title to the equivalent amount of 
donated food shall transfer to the processor at the same time (except 
when the substitution is necessary to meet the 100 percent yield 
requirement or to otherwise replace missing or out-of-condition donated 
food). Once title has transferred, the processor shall use the 
substituted food in accordance with the terms and conditions of this 
part.
    (g) Meat and poultry inspection programs. When donated meat or 
poultry products are processed or when any commercial meat or poultry 
products are incorporated into an end product containing one or more 
donated foods, all of the processing shall be performed in plants under 
continuous Federal meat or poultry inspection, or continuous State meat 
or poultry inspection in States certified to have programs at least 
equal to the Federal inspection programs. In addition to FSIS 
inspection, all donated meat and poultry processing shall be performed 
under AMS acceptance service grading. The cost of this service shall be 
borne by the processor. In the event the processor can demonstrate that 
grading is impractical, exemptions in the use of acceptance services 
shall be approved by the distributing agency prior to processing each 
order. Exemptions in the use of acceptance service graders will be 
authorized on the basis of each order to be processed provided the 
processor can demonstrate:
    (1) That even with ample notification time, the processor cannot 
secure the services of a grader,
    (2) That the cost for a grader would be unduly excessive relative to 
the value of foods being processed and that production runs cannot be 
combined or scheduled to enable prorating of the costs of services among 
the purchasers of end products, or
    (3) The documented urgency of the recipient agency's need for the 
end product precludes the use of acceptance services.

Prior to approving a processor's request to waive the acceptance service 
requirement the distributing agency shall ensure, based on the 
processor's past performance, that the quality of the end product 
produced will in no way be adversely affected as a result of waiving the 
requirement.
    (h) Certification by acceptance service. (1) All processing 
activities of donated foods shall be subject to review and audit by the 
Department, including the applicable Federal acceptance service. The 
contracting agency may also require acceptance and certification by such 
acceptance service in addition to the requirements set forth in 
paragraph (g) of this section.
    (2) In the case of substitutable donated foods, in deciding whether 
to require acceptance and certification, the contracting agency should 
consider the dollar value of the donated foods delivered to the 
processor.
    (3) When contracting agencies require certification in accordance 
with paragraph (h) (1) or (2) of this section, the degree of acceptance 
and certification necessary under the processing contract shall be 
determined by the appropriate Federal acceptance service after 
consultation with the distributing agency concerning the type and volume 
of the donated foods and anticipated value of end products to be 
processed. The cost of this service shall also be borne by the 
processor.
    (i) Labeling end products. (1) Except when end products contain 
donated foods that are substituted under paragraph (f) of this section, 
the exterior shipping containers of end products and, where practicable, 
the individual wrappings or containers of end products, shall be clearly 
labeled ``Contains Commodities Donated by the United States Department 
of Agriculture. This Product Shall Be Sold Only to Eligible Recipient 
Agencies.''
    (2) Labels on all end products shall meet applicable Federal 
labeling requirements.
    (3) When a processor makes any claim with regard to an end product's 
contribution toward meal requirements of any child nutrition program, 
the processor shall follow procedures established by FNS, the Food 
Safety and Inspection Service of the Department, the National Marine 
Fisheries Service of the U.S. Department of Commerce or

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other applicable Federal agencies for approval of such labels.
    (j) Termination of processing contracts. (1) When contracts are 
terminated or completed and the processor has commodities remaining in 
inventory, the processor shall be directed, at the option of the 
distributing agency and the FNSRO, to do the following:
    (i) With respect to nonsubstitutable commodities, the processor 
shall:
    (A) Return the commodities to the contracting agency;
    (B) Pay the contracting agency for the commodities based on the 
Department's replacement costs, determined by using the most recent data 
provided by the Department; or
    (C) Pay the contracting agency for the commodities based on the 
contract value stated in the processor's contract;
    (D) Pay the contracting agency the CCC unrestricted sales price;
    (ii) With respect to substitutable commodities, the processor shall:
    (A) With the concurrence of any affected contracting agencies, 
transfer the donated foods to the accounts of other contracting agencies 
with which the processor has contracts;
    (B) Return the foods donated to the contracting agency;
    (C) Replace the commodities with the same foods of equal or better 
quality as certified in accordance with paragraph (f)(2) of this section 
and deliver such foods to the contracting agency;
    (D) Pay the contracting agency for the commodities based on the 
Department's replacement costs, determined by using the most recent data 
provided by the Department; or
    (E) Pay the contracting agency for the commodities based on the 
contract value stated in the processor's contract.
    (F) Pay the contracting agency the CCC unrestricted sales price.
    (2) When a processor's contract is terminated at the processor's 
request or due to noncompliance or negligence on the part of the 
processor and commodities remaining in the processor's inventory are 
transported pursuant to paragraph (j)(1)(i)(A), (j)(1)(ii)(B) or 
(j)(1)(ii)(C) of this section, the processor shall pay the 
transportation costs.
    (3) Funds received by distributing agencies upon termination of 
contracts shall be used in accordance with FNS Instruction 410-1, Non-
Audit Claims, Food Distribution Program.
    (k) Refund payments. (1) When end products are sold to recipient 
agencies in accordance with the refund provisions of paragraph (d) or 
(e) of this section, each recipient agency shall submit refund 
applications to the processor within 30 days from the close of the month 
in which the sales were made, except that recipient agencies may submit 
refund applications to a single processor on a Federal fiscal quarterly 
basis if the total anticipated refund due for all purchases of product 
from that processor during the quarter is 25 dollars or less.
    (2) In instances when refunds are to be provided to distributors 
which have sold end products to recipient agencies at a discount, 
distributors shall submit refund applications to processors within 30 
days from the close of the month in which the sales were made of the 
date of sale to recipient agencies in order to receive benefits.
    (3) Not later than 30 days after receipt of the application by the 
processor, the processor shall make a payment to the recipient agency or 
distributor equal to the stated contract value of the donated foods 
contained in the purchased end products covered by the refund 
application, except that processors may group together refund 
applications for a single recipient agency on a Federal fiscal quarterly 
basis if the total anticipated refund due that recipient agency during 
the quarter is 25 dollars or less. Copies of requests for refunds and 
payments to recipient agencies and/or distributors shall be forwarded to 
the appropriate distributing agency by the processor.
    (l) Contract approvals. Distributing agencies shall review and 
approve processing contracts entered into or renewed by subdistributing 
and recipient agencies prior to the delivery of commodities for 
processing under such contracts. The distributing agency which enters 
into or approves a processing contract shall provide a copy of the 
contract and of these regulations to the processors, forward a copy of 
the

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contract to the appropriate FNSRO, and retain a copy for its files.
    (m) Performance reports. (1) Processors shall be required to submit 
to distributing agencies monthly reports of performance under each 
processing contract with year-to-date totals. Processors contracting 
with agencies other than a distributing agency shall submit such reports 
to the distributing agency having authority over that particular 
contracting agency. Performance reports shall be postmarked no later 
than the final day of the month following the reporting period; however, 
the final performance report for the contract period shall be postmarked 
no later than 60 postmarked days from the close of the contract year. 
The report shall include:
    (i) A list of all recipient agencies purchasing end products under 
the contract;
    (ii) Donated-food inventory at the beginning of the reporting 
period;
    (iii) Amount of donated foods received during the reporting period;
    (iv) Amount of donated foods transferred to and/or from existing 
inventory;
    (v) Number of units approved end products delivered to each eligible 
recipient agency during the reporting period and the number of pounds of 
each donated food represented by these delivered end products;
    (vi) Donated food inventory at the end of the reporting period;
    (vii) [Reserved].
    (viii) In instances in which sales verification has been delegated 
to the processor pursuant to Sec. 250.19(b)(2), sales verification 
findings shall be reported as an attachment to the December and June 
performance reports in whatever format the State distributing agency 
deems necessary.
    (ix) A certification statement that sufficient donated foods are in 
inventory or on order to account for the quantities needed for 
production of end products for State processing contracts and that the 
processor has on hand or on order adequate quantities of foods purchased 
commercially to meet the processor's production requirements for 
commercial sales.
    (2) In addition to reporting the information identified in paragraph 
(m)(1) of this section, processors which substitute concentrated skim 
milk for donated nonfat dry milk shall also report the following 
information for the reporting period:
    (i) The number of pounds of nonfat dry milk used in commercial 
products sold to outlets which are not recipient agencies; and
    (ii) The number of pounds of concentrated skim milk, and the percent 
of milk solids contained therein, used in end products sold to recipient 
agencies.
    (3) Distributing agencies shall review and analyze reports submitted 
by processors to ensure that performance under each contract is in 
accordance with the provisions set forth in this section.
    (n) Inventory controls. (1) Distributing agencies shall monitor 
processor inventories to ensure that the quantity of donated foods for 
which a processor is accountable is the lowest cost-efficient level but 
in no event more than a six-month supply based on the processor's 
average monthly usage, unless a higher level has been specifically 
approved by the distributing agency on the basis of a written 
justification submitted by the processor. Under no circumstances should 
the amount of donated foods ordered by the contracting agency for 
processing purposes be in excess of anticipated usage or beyond the 
processor's ability to accept and store the donated foods at any one 
time. Distributing agencies shall make no further distribution to 
processors whose inventories exceed these limits until such inventories 
have been reduced.
    (2) For processors substituting concentrated skim milk for donated 
nonfat dry milk, distributing agencies shall review the processors' 
monthly performance reports to ensure that:
    (i) Donated nonfat dry milk inventory is being drawn down based on 
the amount of milk solids contained in the concentrated skim milk which 
was used in end products sold to eligible recipient agencies;
    (ii) An amount of milk solids equivalent to the amount in the 
donated nonfat dry milk is contained in end products sold to eligible 
recipient agencies; and

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    (iii) Donated nonfat dry milk is not being sold in bulk form.
    (3) The last monthly performance report for the contract period, as 
required in paragraph (m)(1) of this section, shall serve as the annual 
reconciliation report. As a part of the annual reconciliation, a 
processor which has entered into a contract with the contracting agency 
for the next year shall pay the distributing agency, at the contract 
value, for any donated food inventory held which is in excess of the 
inventory level which has been approved by the State distributing 
agency. A processor whose contract has been completed or terminated 
shall return or pay for commodities as required by subsection (j).
    (4) Distributing agencies shall certify the accuracy of the annual 
reconciliation report and forward it to the FNS Regional Office. Such 
report shall be postmarked no later than 90 days following the close of 
the contract year. All monies shall be used in accordance with FNS 
Instruction 410-1, Non-Audit Claims, Food Distribution Program.
    (5) Distributing agencies shall not submit food requisitions for 
processors reporting no sales activity during the prior year's contract 
period unless documentation is submitted by the processor which outlines 
specific plans for product promotion or sales expansion.
    (o) Processing inventory reports. (1) Distributing agencies shall 
forward to the FNS Regional Office the inventory summary portion of the 
monthly performance report submitted by the processors in accordance 
with paragraph (m)(1) of this section for the last month of each Federal 
fiscal quarter. Such reports shall be postmarked no later than 60 days 
following the close of each Federal fiscal quarter, except that such 
reports shall be postmarked no later than 90 days following the close of 
the contract year.
    (2) In addition to the reporting requirements in paragraph (o)(1) of 
this section, for each processor which substitutes concentrated skim 
milk for donated nonfat dry milk the distributing agency shall also 
report the following information for the reporting period:
    (i) The number of pounds of nonfat dry milk used in commercial 
products sold to nonprogram outlets; and
    (ii) The number of pounds of concentrated skim milk and the percent 
of milk solids contained therein used in end products sold to recipient 
agencies.
    (p) Cooperation with administering agencies for child nutrition 
programs. If the distributing agency which enters into or approves 
contracts for end products to be used in a child nutrition program does 
not also administer such program, it shall collaborate with the 
administering agency by;
    (1) Giving that agency an opportunity to review all such contracts 
to determine whether end products to be provided contribute to required 
nutritional standards for reimbursement under the applicable regulations 
for such program (7 CFR parts 210, 225, and 226) or are otherwise 
suitable for use in such program;
    (2) Consulting with the agency with regard to the labeling 
requirements for the end products; and
    (3) Otherwise requesting technical assistance as needed from that 
agency.
    (q) FNSRO review of contracts and inventory reports. The FNSRO 
shall:
    (1) Review all processing contracts and provide guidance, including 
written recommendations for termination, where necessary, to 
distributing agencies concerning any contracts which do not meet the 
requirements of this section;
    (2) Allow distributing agencies 30 days to respond to any 
recommendation concerning contracts not meeting the requirements of this 
section;
    (3) Review and analyze the processing inventory reports required by 
paragraph (o) of this section to ensure that no additional donated foods 
shall be distributed to processors with excess inventories until such 
inventories have been reduced;
    (4) Assist distributing agencies in reducing such inventories; and
    (5) Review annual reconciliation reports required by paragraph (n) 
of this section and ensure that payments for commodities have been made.
    (r) Availability of copies of processing contracts. Contracts 
entered into in accordance with this Section are public records and FNS 
will provide copies of

[[Page 440]]

such contracts to any person upon request. The FNSRO will retain copies 
of processing contracts submitted by distributing agencies for a period 
of three years from the close of the Federal fiscal year to which they 
pertain.
    (s) Processing activity guidance. Distributing agencies shall 
develop and provide a processing manual or similar procedural material 
for guidance to contracting agencies, recipient agencies, and 
processors. Distributing agencies must revise these materials as 
necessary to reflect policy and regulatory changes. This guidance 
material shall be provided to contracting agencies, recipient agencies 
and processors at the time of the approval of the initial agreement by 
the distributing agency, when there have been regulatory or policy 
changes which necessitate changes in the guidance materials, and upon 
request. The manual shall include, at a minimum, statements of the 
distributing agency's policies and procedures on (1) contract approval, 
(2) monitoring and review of processing activities, (3) recordkeeping 
and reporting requirements, (4) inventory controls, and (5) refund 
applications.
    (t) Waiver authority. The Food and Nutrition Service may waive any 
of the requirements contained in this part for the purpose of conducting 
demonstration projects to test program changes designed to improve the 
State processing of donated foods.

(Approved by the Office of Management and Budget under control number 
0584-0007)

[53 FR 20226, June 3, 1988, as amended at 53 FR 20598, June 6, 1988; 53 
FR 27476, July 21, 1988; 53 FR 46080, Nov. 16, 1988; 54 FR 7525, Feb. 
22, 1989; 54 FR 25564, June 16, 1989; 58 FR 39122, July 22, 1993; 59 FR 
62984, Dec. 7, 1994; 61 FR 5272, Feb. 12, 1996]