82_FR_1234 82 FR 1231 - Revisions and Clarifications in Requirements for the Processing of Donated Foods

82 FR 1231 - Revisions and Clarifications in Requirements for the Processing of Donated Foods

DEPARTMENT OF AGRICULTURE
Food and Nutrition Service

Federal Register Volume 82, Issue 3 (January 5, 2017)

Page Range1231-1252
FR Document2016-31561

This rule proposes to revise and clarify requirements for the processing of donated foods in order to: Incorporate successful processing options tested in demonstration projects, ensure accountability for donated foods provided for processing, and increase program efficiency. The rule would require multi-State processors to enter into National Processing Agreements to process donated foods into end products, permit processors to substitute commercially purchased beef and pork of U.S. origin and of equal or better quality for donated beef and pork, and would increase oversight of inventories of donated foods at processors. The rule also revises regulatory provisions in plain language, to make them easier to read and understand.

Federal Register, Volume 82 Issue 3 (Thursday, January 5, 2017)
[Federal Register Volume 82, Number 3 (Thursday, January 5, 2017)]
[Proposed Rules]
[Pages 1231-1252]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-31561]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / 
Proposed Rules

[[Page 1231]]



DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 250

RIN 0584-AE38


Revisions and Clarifications in Requirements for the Processing 
of Donated Foods

AGENCY: Food and Nutrition Service (FNS), 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 successful 
processing options tested in demonstration projects, ensure 
accountability for donated foods provided for processing, and increase 
program efficiency. The rule would require multi-State processors to 
enter into National Processing Agreements to process donated foods into 
end products, permit processors to substitute commercially purchased 
beef and pork of U.S. origin and of equal or better quality for donated 
beef and pork, and would increase oversight of inventories of donated 
foods at processors. The rule also revises regulatory provisions in 
plain language, to make them easier to read and understand.

DATES: To be assured of consideration, comments must be received on or 
before March 6, 2017.

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-AE38, by any of the following methods:
    Federal eRulemaking Portal: Go to http://www.regulations.gov. 
Follow the online instructions for submitting comments.
    Email: Send comments to [email protected]. 
Include RIN number 0584-AE38 in the subject line of the message.
    Mail: Send comments to Kiley Larson, Program Analyst, Policy 
Branch, Food Distribution Division, Food and Nutrition Service, U.S. 
Department of Agriculture, Room 500, 3101 Park Center Drive, 
Alexandria, Virginia 22302-1594.
    Hand Delivery or Courier: Deliver comments to the above address.

FOR FURTHER INFORMATION CONTACT: Kiley Larson or Erica Antonson at the 
above address or telephone (703) 305-2680.

SUPPLEMENTARY INFORMATION:

I. Background

    The Department of Agriculture (the Department or USDA) provides 
donated foods to State distributing agencies for distribution to 
recipient agencies (e.g., school food authorities) participating in the 
National School Lunch Program (NSLP) and 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 for use in NSLP 
or other food programs. For example, a whole chicken or chicken parts 
may be processed into precooked grilled chicken strips for use in NSLP. 
The ability to divert donated foods for processing provides recipient 
agencies with more options for using donated foods in their programs. 
The regulations ensure that State and recipient 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, the quantity and variety of donated foods 
provided in the NSLP and other child nutrition programs has increased 
substantially. Donated foods meet the highest quality and safety 
standards and are selected by the Department to assist recipient 
agencies in offering nutritious and well-balanced meals that meet meal 
pattern and nutrition standards for meals served in child nutrition 
programs. Concurrently, the variety of end products offered by 
processors has increased and adapted to reflect the types of foods 
recipient agencies need. 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.
    FNS has used its regulatory waiver authority in current 7 CFR 
250.30(q) to initiate demonstration projects designed to better serve 
recipient agencies and foster a more efficient program. These 
demonstration projects have proven very informative as the industry and 
the needs of recipient agencies have evolved. Many of these methods 
tested, such as the expansion of permitted substitutions and the 
implementation of National Processing Agreements, have proven 
successful and are proposed for codification in this rule.
    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 USDA-approved substitution plan. 
Substitution allows processors more flexibility and efficiency in 
producing finished end products for school food authorities which helps 
minimize cost while ensuring quality.
    In May 2013, FNS initiated a demonstration project which permitted 
processors with a USDA-approved substitution plan to substitute 
commercially purchased beef and pork for donated beef and pork, in 
accordance with the processor's USDA-approved substitution plan. In 
accordance with the terms of the demonstration project, as established 
in FNS policy memorandum FD-130: Processing--Substitution of USDA Beef 
and Pork, the commercial product must be of U.S. origin and of equal or 
better quality in all Departmental purchase specifications than the 
donated food.

[[Page 1232]]

Among other requirements of the demonstration project, the substitution 
plan has required assurances that: (1) Processing is performed in 
plants under continuous Federal or State meat inspection; (2) the 
Department's Agricultural Marketing Service (AMS) graders monitor the 
process to ensure compliance with substitution requirements; (3) 
commercial product is purchased from an AMS-approved vendor in good 
standing and is tested to ensure that it is of equal or better quality 
in all Departmental purchase specifications, including specifications 
relating to acceptable tolerance levels for specific microorganisms, 
chemical residues, and fat; and (4) commercial product is subject to 
audited processes for humane handling, food defense, and threat agent 
testing.
    In October 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. Review and approval of 
end product data schedules, however, is a time and labor-intensive 
activity for State distributing agencies. National approval of end 
product data schedules under the demonstration project has reduced the 
time and labor burden considerably for both distributing agencies and 
all multi-State processors since processors are not required to submit 
end product data schedules for approval in each State in which they 
operate.
    In conjunction with the demonstration project allowing national 
approval of end product data schedules, FNS requires multi-State 
processors to sign a National Processing Agreement. 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. Under the demonstration project, the 
monitoring and protection of donated food inventories held by 
processors at the national level has further reduced the burden on 
distributing agencies. Distributing agencies may include other State-
specific processing requirements and select the processor's nationally 
approved end products for sale in the State under their State 
Participation Agreements with multi-State processors.
    On August 24, 2006, FNS published a proposed a rule to revise and 
clarify requirements for the processing of donated foods (71 FR 50249). 
As part of this proposed rule, FNS proposed to retain title to donated 
foods delivered to multi-State processors until acceptance of finished 
end products by the State distributing or recipient agency. It was 
subsequently determined that FNS needed additional statutory authority 
to retain title to donated foods at the processor and the rule was not 
finalized pending legislative change. Section 4104 of the Agricultural 
Act of 2014 (Pub. L. 113-79, the Farm Bill) amended Section 17 of the 
Commodity Distribution Reform Act and WIC Amendments of 1987, 7 U.S.C. 
612c note to provide that authority and the necessary statutory 
authority for FNS to promulgate regulations ensuring accountability of 
USDA Donated Foods.
    The regulatory amendments proposed in this rule would implement 
provisions of the Farm Bill related to processing of donated foods and 
incorporate into 7 CFR part 250 the processing options provided under 
the demonstration project described above. They would also more 
effectively ensure accountability for donated foods provided for 
processing while streamlining requirements to increase program 
efficiency for recipient agencies. Most significantly, the rule 
proposes to:
    (1) Require that FNS retain title of USDA Donated Foods while at 
multi-State processors;
    (2) Require each multi-State processor to sign a National 
Processing Agreement 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) Permit substitution of donated beef and pork with commercial 
beef and pork of U.S. origin and of equal or better quality in all 
Departmental purchase specifications than the donated food, provided 
applicable requirements are met, including a USDA-approved substitution 
plan;
    (5) Establish a title transfer exception dictating that when a 
recipient agency has contracted with a distributor to act as an 
authorized agent, title to finished end products containing donated 
foods transfers to the recipient agency upon delivery and acceptance by 
the contracted distributor;
    (6) Require processors providing end products containing donated 
foods to a distributor to enter into a written agreement with the 
distributor specifying the (a) distributor's financial liability for 
the replacement value of donated foods once delivered to the 
distributor; (b) frequency of reporting; and (c) applicable value pass 
through system; and
    (7) Require distributing agencies to more closely monitor donated 
food inventories at processors to ensure that processors do not 
maintain inventories in excess of what can be effectively utilized by 
recipient agencies in a timely manner.
    As discussed below, we propose to amend current Sec. Sec.  250.2, 
250.11, 250.18 and 250.19, and to completely revise 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 but not to 
change or alter the interpretation and application of the revised 
sections. The proposed changes to 7 CFR part 250 are discussed in 
detail below.

II. Discussion of the Rule's Provisions

A. Definitions, Sec.  250.2

    Due to developments in food distribution programs, and for the 
purpose of clarification, we propose to remove, revise, and add 
definitions in current Sec.  250.2 relating to processing of donated 
foods. We propose to remove the definitions of ``Contracting agency'' 
and ``Fee-for-service.'' 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 term ``Fee-for-
service'' is clear in the context of the proposed regulatory provisions 
and no longer requires a separate definition.
    We propose to add definitions of ``Backhauling,'' ``Commingling,'' 
``End product data schedule,'' ``In-State Processing Agreement,'' 
``National Processing Agreement,'' ``Recipient Agency Processing 
Agreement,'' ``Replacement value,'' and ``State Participation 
Agreement.'' The definition of ``Backhauling'' would describe a means 
of delivery of donated food to a processor from a recipient agency's 
storage facility. The definition of ``Commingling'' would describe the 
common storage of donated foods with commercially purchased foods. The 
definition of ``End product data schedule'' would convey the important 
function of this document in describing

[[Page 1233]]

the processing of donated foods into finished end products. Definitions 
of ``National Processing Agreement,'' ``Recipient Agency Processing 
Agreement,'' ``State Participation Agreement,'' and ``In-State 
Processing Agreement'' would help the reader understand the different 
types of processing agreements permitted. These processing agreements 
are further described in the proposed Sec.  250.30. The definition of 
``Replacement value'' would clarify the donated food value that must be 
used by processors to ensure compensation for donated foods lost in 
processing or other activities. The definition of ``Replacement value'' 
reflects the price in the market at the time that the Department 
assigns the value whereas the definition of ``Contract value'' in 
current regulations reflects the Department's current acquisition 
price, which is set annually.

B. Delivery and Receipt of Donated Food Shipments, Sec.  250.11

    We propose to amend current Sec.  250.11(e), 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 or recipient agency upon its acceptance of the donated 
foods 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 amendments made by Section 4104 of the Farm Bill and the 
requirements under National Processing Agreements proposed in this 
rule. In the proposed 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 in the inventory 
of 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 in Sec.  250.11(e) 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.
    Many recipient agencies receiving finished end products from multi-
State processors contract with a distributor to store end products and/
or transport the finished end products to their facilities. The 
inclusion of distributors in the supply chain for finished end products 
creates challenges related to tracking and reporting the value of 
donated foods. Because processors are not a party to the contractual 
relationship between recipient agencies and distributors, processors 
lose control of finished end products once they are delivered to the 
distributors designated by each recipient agency. Therefore, we propose 
in this rulemaking that when a distributor is contracted by the 
recipient agency for the transportation and/or storage of finished end 
products and is acting as the recipient agency's authorized agent 
(i.e., purchasing processed end products containing donated foods on 
behalf of the recipient agency), title of donated foods would transfer 
to the recipient agency upon the acceptance of finished end products at 
the time and place of delivery at the recipient agency or the 
distributor acting as the authorized agent of the recipient agency, 
whichever happens first.
    Currently, in situations where recipient agencies contract with a 
distributor to store and/or transport processed end products containing 
donated foods and act as their authorized agent, complications can 
arise that may impede the transfer of title described above. Some 
processors and distributors, working in this manner, manufacture and/or 
order some processed end products prior to receiving donated food 
orders from recipient agencies. This results in processors and 
distributors ``pooling'' their inventories of processed end products, 
particularly for products containing nonsubstitutable items. In other 
words, processors will manufacture finished end products and 
distributors will order and receive processed end products from the 
processor without either entity knowing specifically which recipient 
agency will order or receive those items. This is most commonly due to 
processors and/or distributors manufacturing/ordering end products in 
advance of receiving orders from recipient agencies based on forecasted 
estimates. The diagram below illustrates the differences between 
``pooled'' and ``non-pooled'' inventory in these specific cases (i.e., 
nonsubstitutable donated food traveling through a supply chain that 
includes a distributor acting as the recipient agency's authorized 
agent).
    In the case of ``pooled'' inventories (as illustrated below), under 
current regulations title cannot transfer to the recipient agency at 
the time of delivery at their contracted distributor because neither 
the processor nor the distributor know which recipient agency will 
receive which products. The intent of the proposed Sec.  250.11(e) is 
to discourage the pooling of processed end products containing 
nonsubstitutable donated foods (i.e., end products must be assigned to 
a specific recipient agency by the time they are accepted at a 
distributor so that the title may be transferred to the correct 
recipient agency).
    Current Practice:

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[GRAPHIC] [TIFF OMITTED] TP05JA17.314

    This shift in the timing of title transfer would impact the 
calculation of performance bonds currently being required of multi-
State processors through National Processing Agreements. All other 
factors held equal, some multi-State processors would encounter a 
reduction in the required annual bond amount, as determined by FNS, due 
to the transfer of title of donated foods to the recipient agency 
taking place at an earlier stage in the supply chain. Although this 
shift would reduce inventories and bonding amounts for some multi-State 
processors, it would also place more responsibility on recipient 
agencies to track and protect the value of donated food inventories 
being managed by their designated distributors, acting as their agents.

C. Reporting Requirements, Sec.  250.18

    In current Sec.  250.18(b), processors are required to submit 
monthly performance reports to the distributing agency, in accordance 
with current Sec.  250.30(m). We propose to retain this requirement but 
to clarify that processors must submit performance reports and other 
supporting documentation, as required by the distributing agency or by 
FNS, in accordance with proposed Sec.  250.37.

D. Recordkeeping Requirements, Sec.  250.19

    In current Sec.  250.19(a), processors must maintain records 
documenting the sale of end products to recipient agencies, including 
the sale of such end products by distributors. As discussed later in 
the preamble, we are proposing to include specific recordkeeping 
requirements for processors in the

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proposed Sec.  250.37(d). Hence, we propose to amend this section to 
require that processors must comply with the applicable recordkeeping 
requirements in Subpart C of this part and with any other recordkeeping 
requirements included in their agreements.

E. 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 rewrite these sections in plain language. 
We propose to include the requirements for specific processing 
activities in the order in which they most commonly 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 Processing of donated foods into end products.
250.31 Procurement requirements.
250.32 Protection of donated food value.
250.33 Ensuring processing yields of donated foods.
250.34 Substitution of donated foods.
250.35 Storage, food safety, 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. Processing of Donated Foods Into End Products, Sec.  250.30
    In the proposed 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, In-State, and Recipient Agency Processing 
Agreements. However, we propose to include the specific provisions 
required for each type of agreement in the proposed Sec.  250.38, as 
the reason for their inclusion would only be clear with an 
understanding of the processing requirements contained in the preceding 
sections.
    In the proposed 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. Currently, most donated 
foods are processed in accordance with National Processing Agreements 
or In-State Processing Agreements. However, some large school food 
authorities currently have agreements with processors to process 
donated foods and contracts to 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.
    In the proposed 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 proposed Sec.  250.30(b) the 
stipulation in current Sec.  250.30(c)(5)(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. We propose to 
clarify that the agreements described in this section are required in 
addition to, not in lieu of, competitively procured contracts required 
in accordance with Sec.  250.31. We propose to revise the requirement 
in current Sec.  250.30(c)(4) that indicates which official of the 
processor must sign the processing agreement and more simply state in 
proposed Sec.  250.30(b) that the processing agreement must be signed 
by an authorized individual acting for the processor. 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 Agreement 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. Hence, in the proposed Sec.  250.30(c), we would 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, in 
the proposed Sec.  250.32, FNS holds and manages the multi-State 
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 in 
the proposed Sec.  250.30(d).
    In the proposed Sec.  250.30(d), we would 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 proposed 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. We propose to require the distributing agency to 
utilize selection criteria in current Sec.  250.30(c)(1) to select 
processors with which to enter into State Participation Agreements.
    Currently, a distributing agency must enter into an In-State 
Processing Agreement with an in-State processor (i.e., a processor 
which only services recipient agencies in a single State via a 
production facility located in the same

[[Page 1236]]

State) to process donated foods into finished end products for sale in 
the State. Under such an agreement, the distributing agency may procure 
the services and 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 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 In-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 proposed Sec.  250.30(e), we propose to clarify the 
distinction between master agreements and other In-State Processing 
Agreements and to include in this proposed section the required 
criteria in current Sec.  250.30(c)(2) for selecting processors under 
master agreements. We propose to require that the distributing agency 
enter into an In-State Processing Agreement with an in-State processor 
to process donated foods, as currently required under the demonstration 
project.
    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 
proposed Sec.  250.30(f), and to refer to them as Recipient Agency 
Processing Agreements. We also propose to clarify that, under such 
agreements, the distributing agency may also delegate oversight and 
monitoring to the recipient agency to approve end product data 
schedules or select nationally approved end product data schedules, 
review processor performance reports, manage the performance bond or 
letter of credit of an in-State processor, 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 Agency 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). We propose to require the recipient agency to 
utilize selection criteria in current Sec.  250.30(c)(1) to select 
processors with which to enter into Recipient Agency Processing 
Agreements. We propose to include the requirement in current Sec.  
250.30(l) that the distributing agency approve all Recipient Agency 
Processing Agreements. In general, FNS recommends that distributing 
agencies consult with the State administering agency for the review and 
approval of these agreements, if necessary. State administering 
agencies have experience reviewing and establishing processes to review 
contracts which are similar to Recipient Agency 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 
proposed Sec.  250.30(g), but to clarify that the requirements only 
apply to distributing agencies that procure end products on behalf of 
recipient agencies or otherwise limit recipient agencies' access to the 
procurement of specific end products. We also propose to clarify that 
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)(5)(xv), 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. We propose to clarify, in the proposed 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 written consent as part of 
its State Participation Agreement or In-State Processing Agreement with 
the processor.
    In the proposed Sec.  250.30(i), we would require agreements 
between processors and distributors. This proposal would provide 
distributing and recipient agencies with another tool to ensure that 
the value of donated foods and finished end products are properly 
credited and provided to recipient agencies when third party 
distributors exist in the supply chain between processors and recipient 
agencies. The agreement, initiated by the processor before releasing 
finished end products to a distributor, must reference, at a minimum, 
the financial liability (i.e., who must pay) for the replacement value 
of donated foods, not less than monthly end product sales reporting 
frequency, requirements under Sec.  250.11, and the applicable value 
pass through system to ensure that the value of donated foods and 
finished end products are properly credited to recipient agencies. 
Distributing agencies could set additional requirements such as 
requiring that copies or templates of these agreements be included with 
the submission of signed State Participation Agreements.
    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 proposed Sec.  250.30(j), 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 (e.g., 
when new subcontractors are added), with the concurrence of the parties 
to the agreement, and that such amendments would 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 related to processing agreements, as they are 
overly restrictive or unnecessary given current practice and 
administrative structure:
     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)(3) that the 
agreement be prepared and reviewed by State legal staff to ensure 
conformance with Federal regulations.

[[Page 1237]]

     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 processors and the FNS Regional 
Office.
2. Procurement Requirements, Sec.  250.31
    The requirements for the procurement of goods and services under 
Federal grants are established in 2 CFR part 200 and USDA implementing 
regulations at 2 CFR part 400 and Part 416, as applicable. In the 
proposed Sec.  250.31(a), we propose to indicate the applicability of 
these requirements to the procurement of processed end products, 
distribution, or of other processing services related to donated foods. 
We also propose to indicate that distributing or recipient agencies may 
use procurement procedures that conform to applicable State and local 
laws, as appropriate, but must ensure compliance with the Federal 
procurement requirements.
    In the proposed Sec.  250.31(b), we would 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 would be 
utilized, an assurance that crediting for donated foods would be 
performed in accordance with the applicable requirements for such 
method of sales in proposed Sec.  250.36, the contract 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)(5)(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)(5)(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 proposed 
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 and unnecessarily 
complicates this section. 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 at least 75 percent of the value of 
donated foods in the processor's physical or book inventory, as 
determined annually, and at the discretion of FNS, for processors under 
National Processing Agreements. For multi-state processors in their 
first year of participation in the processing program, the amount of 
the performance bond or letter of credit must be sufficient to cover 
100 percent of the value of donated foods, as determined annually, and 
at the discretion of FNS. This proposed clarification would codify 
existing Program policy.
    In the proposed Sec.  250.32(b), we propose to indicate the 
conditions under which the distributing or recipient agency must call 
in the performance bond or letter of credit. We also propose to 
indicate that FNS would call in the performance bond or letter of 
credit under the same conditions and would ensure that any monies 
recovered by FNS are reimbursed to distributing agencies for losses of 
entitlement foods.
4. Ensuring Processing Yields of Donated Foods, Sec.  250.33
    In current Sec.  250.30(c)(5), 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, 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 for the donated food;
     The contract value of the donated food; and
     Any pricing information in addition to the charge for the 
end product or fee-for-service.
    In the proposed 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. In the proposed Sec.  250.33(a), we 
would 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, in the proposed Sec.  250.31, 
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 a competitive 
procurement has been performed by the distributing agency under its In-
State Processing Agreement or State Participation Agreement. Prices 
currently included on end product data schedules generally reflect the 
highest price that a processor would charge for the finished end 
product and not necessarily the actual price of the 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., pounds 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 In-State 
Processing Agreements. We propose to clarify that the end product data 
schedules for products containing donated red meat or poultry must also 
be approved by the Department, as is currently required under the 
demonstration project. 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 in a standard electronic format dictated by 
FNS, 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 proposed Sec.  250.33(b), we propose to describe the different 
processing yields of donated foods that may be approved in end product 
data schedules. In current Sec.  250.30(c)(5)(ii), the processor must 
meet a 100 percent yield in the processing of all

[[Page 1238]]

substitutable donated foods (i.e., generally all donated foods except 
beef, pork and poultry). Under 100 percent yield, the processor must 
ensure that 100 percent of the raw donated food diverted for processing 
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. These reductions must be reported 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 proposed Sec.  250.33(b)(1). We 
propose to indicate that FNS may make exceptions to the 100 percent 
yield requirement, on a case-by-case basis. Exceptions to the 100 
percent yield requirement can result in one of the alternate processing 
yields described below.
    Processing of donated foods such as beef, pork, and poultry 
invariably results in significant loss of product, such as the bones in 
chicken or fat in beef and pork. 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. In an effort to simplify the yield requirements and 
streamline monitoring for distributing and recipient agencies we 
propose to limit the processing yields to 100 percent yield, guaranteed 
yield, and standard yield.
    Under guaranteed yield, the processor must ensure that a specific 
quantity of end product would be produced from a specific quantity of 
donated food put into production. The guaranteed yield for a specific 
product is determined and agreed upon by the parties to the processing 
agreement, and, for In-State and Recipient Agency Processing 
Agreements, approved by the Department. Guaranteed yield is generally 
used when significant variance is present across processors in 
manufacturing and yield for a particular end product. The guaranteed 
yield must be indicated on the end product data schedule. We propose to 
describe guaranteed yield in the proposed Sec.  250.33(b)(2).
    Under standard yield, the processor must ensure that a specific 
quantity of end product, as determined by the Department, would be 
produced from a specific quantity of donated food. The standard yield 
is determined and applied uniformly by the Department to all processors 
for specific donated foods. 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. If necessary, the processor must use commercially 
purchased food of the same generic identity, of U.S. origin, and equal 
or better in all USDA procurement specifications than the donated food 
to provide the number of cases required to meet the standard yield to 
the distributing or recipient agency, as appropriate. Like guaranteed 
yield, standard yield ensures that the recipient agency would receive a 
specific quantity of end product, which helps to ensure that it can 
meet its food service needs. We propose to describe standard yield in 
the proposed Sec.  250.33(b)(3).
    In the proposed Sec.  250.33(c), we would 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. 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. 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. 
Loss of donated foods may result for a number of reasons, including the 
processor's failure to meet the required processing yield or failure to 
produce end products that meet required specifications, as described 
above, spoilage or damage of donated foods in storage, or improper 
distribution of end products. In order to compensate for such losses of 
donated 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 equal or better in all USDA procurement specifications than 
the donated food; or
    (2) Return end products that are wholesome but do not meet required 
specifications to production for processing into the requisite quantity 
of end products that meet the required specifications; or
    (3) Pay the distributing or recipient agency, as appropriate, for 
the replacement value of the donated food or commercial substitute only 
if the purchase of replacement foods is not feasible and the processor 
has received approval. In-State processors would be required to obtain 
distributing agency approval for such payment and multi-State 
processors would be required to obtain FNS approval.
    In current Sec.  250.30(c)(5)(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. We propose to include this requirement in the proposed Sec.  
250.33(d), 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)(5)(viii)(D) that the 
processor credit the distributing or recipient agency for the sale of 
donated food containers because the burden required to monitor the 
credit outweighed the value returned.
    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 proposed Sec.  250.33(e).
5. Substitution of Donated Foods, Sec.  250.34
    We propose to include requirements for the substitution of donated 
foods in the proposed 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. 
Under current regulations, substitution of donated poultry is permitted 
with some limitations in accordance with a processor's USDA-approved 
substitution plan. Substitution of

[[Page 1239]]

donated beef and pork is not permitted under the current regulations.
    As previously discussed in the preamble, beginning in 2013, the 
Department used its regulatory waiver authority, to permit processors 
with a Department-approved Processor Control Certification Program plan 
to substitute commercially purchased beef and pork for donated beef and 
pork. The commercial product must be of U.S. origin, and of equal or 
better quality in all Departmental purchase specifications than the 
donated food. In addition, only donated beef and pork delivered to the 
processor from a USDA vendor may be substituted. Donated beef and pork 
delivered to a processor from a recipient agency facility for 
processing may not be substituted (this process is commonly called 
backhauling). In a similar manner, substitution of backhauled donated 
poultry is prohibited in current Sec.  250.30(f)(1)(ii).
    In the proposed Sec.  250.34(a), we propose to permit a processor 
to substitute any donated food that is delivered to it from a USDA 
vendor with commercially purchased food of the same generic identity, 
of U.S. origin, and of equal or better quality in all Departmental 
purchase specifications than the donated food. We propose to clarify 
that commercially purchased beef, pork or poultry must meet the same 
specifications as donated product, including inspection, grading, 
testing, and humane handling standards, and must be approved by the 
Department in advance of substitution. Hence, we propose to remove the 
required elements of a processor's plan for poultry substitution in 
current Sec.  250.30(f)(1)(ii)(B).
    In current Sec.  250.30(f)(1)(ii)(A), substitution of commercial 
poultry for donated poultry may be made before the processor actually 
receives a shipment of the donated poultry. In such case, however, the 
processor assumes all risks if, due to changing market conditions or 
other reasons, the Department is unable to purchase and deliver donated 
poultry to the processor for processing. In the proposed Sec.  
250.34(a), we propose to allow a processor the option to substitute any 
donated food in advance of the receipt of the donated food shipment and 
to more clearly describe the processor's assumption of risk should the 
Department be unable to purchase and deliver any donated food so 
substituted. Lastly, we propose to require that commercially purchased 
food substituted for donated food meet the same processing yield 
requirements that would be required for the donated food, as in the 
proposed Sec.  250.33.
    Donated food may be backhauled to a processor from a recipient 
agency facility when a recipient agency determines that, despite 
earlier projections, it is unable to utilize the donated food in its 
current form. Rather than see it go to waste, the recipient agency 
provides the food to a processor to process into a more usable form. In 
the proposed Sec.  250.34(b), we propose to prohibit substitution or 
commingling of all backhauled donated foods and to require that the 
processor, if amenable to reformulation, process such end products into 
end products for sale and delivery to the same recipient agency that 
provided them and not to any other recipient agency. In other words, 
the recipient agency which backhauls a previously processed end product 
to a processor for reformulation must in turn use the reformulated end 
products, containing their backhauled product, in their food service. 
Additionally, we propose to prohibit the processor from providing 
payment to the recipient agency in lieu of processing and prohibit the 
distributing or recipient agency from transferring the backhauled food 
to another processor.
    In current Sec.  250.30(g), the processing of donated beef, pork 
and poultry must occur under Federal acceptance service grading in 
order to assure that substitution and yield requirements are met and 
that end products conform with the applicable end product data 
schedule. Such grading is conducted by the Department's Agricultural 
Marketing Service. The grader verifies the quality and quantity of food 
that is put into production, and the quantity of end products produced, 
and includes the pertinent information on a grading certificate. The 
processor is responsible for paying the cost of the acceptance service 
grading. In current Sec.  250.30(f)(1), the processor must maintain 
records (including grading certificates) necessary to document that 
substitution of all donated foods has been conducted in accordance with 
the requirements in 7 CFR part 250. We propose to include all of these 
requirements in the proposed Sec.  250.34(c).
    In current Sec.  250.30(g), the distributing agency may approve a 
waiver of the grading requirement for donated beef, pork, or poultry 
under certain conditions. We propose to include this contingency, and 
retain the current conditions under which the distributing agency may 
approve such a waiver, in the proposed Sec.  250.34(d). However, we 
propose to indicate that such waivers may only be approved on a case by 
case basis--e.g., for a specific production run. The distributing 
agency may not approve a blanket waiver of the requirement. We also 
include the current stipulation that a waiver may only be approved if 
the processor's past performance indicates that the quality of the end 
product would not be adversely affected.
    Also, in current Sec.  250.30(f)(1)(ii)(A), the processor may use 
donated poultry that has been substituted with commercially purchased 
poultry in any processing activities conducted at its facilities. 
Additionally, in current Sec.  250.30(f)(2), substituted donated food 
must be used by the processor and may not be sold or disposed of in 
bulk form. In the proposed Sec.  250.34(e), we propose to include the 
current provision that the processor may use any substituted donated 
food in other processing activities conducted at its facilities. We 
propose to remove the stipulation, in current Sec.  250.30(f)(4), that 
title to the substituted donated food passes to the processor upon the 
initiation of processing of the end product with the commercial 
substitute. The transfer of title to donated foods, which are part of 
the Federal grant, is limited to the distributing agency or recipient 
agency, as the recipients of the grant. Subsequent donated food 
activities may be performed in accordance with Federal regulations and 
the terms of processing agreements but would not include a further 
transfer of title.
    We propose to remove the requirements in current Sec.  
250.30(f)(1)(iii) that the processor maintain documentation that it has 
not reduced its level of commercial production in exercising the option 
to substitute commercially purchased foods for donated foods, or that 
it has made sufficient purchases to meet the 100 percent yield 
requirement in processing of donated foods. In addition to being 
virtually impossible to determine, it is unlikely that a processor 
would choose to process donated foods if it were to adversely affect 
its commercial activities. The requirement that the processor 
compensate the distributing or recipient agency for failure to meet 
required processing yields of donated foods, as in the proposed Sec.  
250.33(f), is more appropriate, and effective, than a requirement that 
the processor make specific purchases of foods in the commercial 
market.
6. Storage, Food Safety, Quality Control, and Inventory Management, 
Sec.  250.35
    We propose to include requirements for the storage, food safety 
oversight, quality control, and inventory management of donated foods 
provided for processing in the proposed Sec.  250.35. In current Sec.  
250.30(c)(5)(x), the

[[Page 1240]]

processor must describe its quality control system and assure that an 
effective quality control system will be maintained for the duration of 
its agreement. In the proposed Sec.  250.35(a), we would require the 
processor to ensure the safe and effective storage of donated foods, 
including compliance with the general storage requirements in current 
Sec.  250.12, and to maintain an effective quality control system at 
its processing facilities. We propose to require the processor to 
maintain documentation to verify the effectiveness of its quality 
control system and to provide such documentation upon request.
    In current Sec.  250.30(g), the processing of donated beef, pork 
and poultry, and of commercial meat products that contain any donated 
foods, must be performed in plants under continuous Federal meat or 
poultry inspection. However, in States certified as having programs at 
least equal to Federal standards, processing of such foods may be 
performed in plants under continuous State meat or poultry inspection 
for processed end products that are utilized in the State, rather than 
the Federal inspection. We propose to simplify these regulations in the 
proposed Sec.  250.35(b) by requiring that all processing of donated 
foods is conducted in compliance with all Federal, State, and local 
requirements relative to food safety.
    In the proposed Sec.  250.35(c), we propose to clarify that a 
processor may commingle donated foods and commercially purchased foods, 
unless the processing agreement specifically stipulates that the 
donated foods must be used in processing, and not substituted, or the 
donated foods have been backhauled from a recipient agency. However, we 
propose to clarify that such commingling must be performed in a manner 
that ensures the safe and efficient use of donated foods, as well as 
compliance with substitution requirements, and with reporting of 
donated food inventories on performance reports, as required in 7 CFR 
part 250.
    We also propose to require that processors ensure that commingling 
of finished end products with other food products by distributors 
results in the sale to recipient agencies of end products that meet 
substitution requirements. One way that this may be achieved is by 
affixing the applicable USDA certification stamp to the exterior 
shipping containers of such end products. This incorporates the 
provision in current Sec.  250.30(f)(1)(ii)(B) that finished poultry 
end products that have not been produced under AMS acceptance service 
grading may not be substituted for end products containing donated 
foods. However, we propose to remove the requirement in current Sec.  
250.30(i) that exterior shipping containers or product labels for end 
products containing nonsubstitutable donated foods include such 
information to ensure their sale to eligible recipient agencies. Such 
assurance may be made through notification of the appropriate parties 
or by other means.
    In current Sec.  250.30(n)(1), a processor is limited in the amount 
of donated foods for which it is accountable at any one time. A 
processor may not have on hand more than a six-month supply of donated 
foods, based on an average amount utilized for that period. However, 
the distributing agency may, at the processor's request, provide 
written approval to allow the processor to maintain a larger amount of 
donated foods in inventory if it determines that the processor may 
efficiently store and process such an amount. The distributing agency 
may not order donated foods for delivery to a processor if it would 
result in excessive inventories, unless it has granted such approval. 
We propose to include the current limitation on inventories of donated 
foods at a processor in the proposed Sec.  250.35(d) and to clarify 
that distributing agencies are not permitted to submit food orders 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 donated food drawdown, product promotion, 
or sales expansion. Many distributing agencies have adopted ``sweep'' 
policies in which they transfer excess processor inventories for one 
recipient agency to another recipient agency or processor which is 
willing to accept it, to ensure that inventory is used effectively. For 
example, a distributing agency may transfer a recipient agency's 
remaining inventory at a processor to another recipient agency that is 
willing to accept such foods and use the foods efficiently. Such 
policies provide an additional tool for distributing agencies to ensure 
that donated foods are used efficiently and that processors and 
recipient agencies effectively manage their donated food inventories. 
We propose to include an allowance for FNS to require an inventory 
transfer to another State distributing agency or processor when 
inventories are determined to be excessive for a State distributing 
agency or processor, i.e., more than six months on-hand or exceeding 
the established inventory protection, to ensure full utilization prior 
to the end of the school year.
    In current Sec.  250.30(n)(3), a processor must pay the 
distributing agency for the value of donated foods held in excess of 
allowed inventory levels at the end of the year, as indicated on the 
June performance report. However, in practice, the distributing agency 
often allows a processor to carry over such donated foods into the next 
year of the agreement, in accordance with its authority to approve 
donated food inventories in excess of the six-month limitation. The 
distributing agency may also direct the processor, in accordance with 
current Sec.  250.12(e), to transfer donated foods held in excess of 
allowed levels to another distributing or recipient agency, or 
processor, if the processor is unable to process such foods. In the 
proposed Sec.  250.35(e), we propose to clarify that the distributing 
agency may permit the processor to carry over donated foods in excess 
of allowed levels into the next year of its agreement, if the 
distributing agency determines that the processor may efficiently 
process such foods. We also propose to include the distributing 
agency's current option to direct the processor to transfer or re-
donate such donated foods to another distributing or recipient agency 
or processor. Lastly, we propose to clarify that, if these options are 
not practical, the distributing agency must require the processor to 
pay for the donated foods held in excess of allowed levels in an amount 
equal to the replacement value of the donated foods.
    In current Sec.  250.30(j), when an agreement terminates, and is 
not extended or renewed, the distributing agency must direct the 
processor to return donated foods remaining in inventory or pay the 
distributing or recipient agency as applicable for the donated foods at 
the replacement value. For substitutable donated foods, the 
distributing agency may also permit the processor to return 
commercially purchased foods that meet substitution requirements in 
place of the donated foods or transfer the donated foods to other 
agencies with which it has entered into agreements. In the proposed 
Sec.  250.35(f), we propose to expand the current options for the 
disposition of substitutable donated foods at the termination of an 
agreement to all donated foods, in accordance with our proposal in the 
proposed Sec.  250.34 to permit substitution of all donated foods. We 
propose to clarify that the disposition of donated foods may include a 
transfer; i.e., the distributing agency may permit a transfer of 
donated foods to another State distributing agency, with FNS approval, 
in

[[Page 1241]]

accordance with current Sec.  250.12(e). We also propose to permit the 
transfer of commercially purchased foods that meet the substitution 
requirements in the proposed Sec.  250.34 in place of the donated 
foods. We propose to permit the processor to pay the distributing or 
recipient agency, as appropriate, for the donated foods only if 
returning or transferring the donated foods or commercially purchasing 
food that meets the substitution requirements is not feasible and if 
FNS approval has been granted. If the distributing agency requires the 
processor to pay for donated foods, we propose to require such payment 
at the contract value or replacement value, whichever is higher, rather 
than the several options for assigning the donated food value currently 
included in the regulations. We propose to include the current 
requirement that the processor pay the cost of transporting any donated 
foods when the agreement is terminated at the processor's request or as 
a result of the processor's failure to comply with the requirements of 
7 CFR part 250.
    We propose to remove the stipulation in current Sec.  250.30(j)(3) 
that funds received by distributing agencies from payments for donated 
foods upon termination of an agreement be used in accordance with Sec.  
250.17(c). The allowable use of funds accruing from program operations, 
including funds received by distributing agencies from payments for 
donated foods upon termination of an agreement, is described in current 
Sec.  250.17 and thus the stipulation is no longer necessary.
7. End Product Sales and Crediting for the Value of Donated Foods, 
Sec.  250.36
    In current Sec.  250.30(d)(1), a processor must sell end products 
to recipient agencies under a system that assures such agencies receive 
credit or ``value pass-through'' for the contract value of donated food 
contained in the end product. And, in current Sec.  250.30(e), a 
processor must ensure that, when end products are provided to 
commercial distributors for sale and delivery to recipient agencies, 
such sales occur under a system that provides such agencies with a 
credit for the contract value of donated food contained in the end 
product. In the proposed Sec.  250.36(a), we would require that the 
sales of end products, either directly by the processor or through a 
commercial distributor, be performed utilizing one of the methods of 
end product sales contained in this section, to ensure that the 
distributing or recipient agency, as appropriate, receives credit for 
the value of donated foods contained in end products. We also propose 
to require that all systems of sales utilized must provide clear 
documentation of crediting for the value of the donated foods contained 
in the end products.
    In current Sec.  250.30(d)(1)(i), a processor may utilize a refund 
or rebate system, in which the processor sells end products to the 
distributing or recipient agency, as appropriate, at the commercial or 
gross price, and provides the appropriate agency with a refund for the 
contract value of donated foods contained in the end products. In 
current Sec.  250.30(e), a distributor may also sell end products 
received from the processor under a refund system, with the processor 
responsible for providing the refund to the appropriate agency. We 
propose to permit end product sales under this system, by either the 
processor or distributor, in the proposed Sec.  250.36(b). We propose 
to require the processor to remit the refund to the distributing or 
recipient agency, as appropriate, within 30 days of receiving a request 
for a refund from the appropriate agency. We propose to clarify that 
the refund request must be in writing but may be transmitted via email 
or other electronic means. We propose to remove the requirement in 
current Sec.  250.30(k) that the recipient agency submit a refund 
application to receive a refund for the value of donated foods in end 
products, as the term ``refund application'' implies the submittal of a 
written form, which is not necessary. Additionally, we propose to 
remove the 30-day, or quarterly, period by which the distributing or 
recipient agency must currently submit such a request. Once end product 
sales are made, we would expect requests for refunds to be made in an 
expeditious manner in the interest of the program. The agency may 
determine how frequently it wishes to receive its refunds, but refunds 
must be issued more frequently than annually. To that end, we also 
propose to remove the option, in current Sec.  250.30(k)(3), for the 
processor to submit refunds that total $25 or less on a quarterly 
basis.
    In current Sec.  250.30(d)(1)(ii), the processor may utilize a 
discount system, in which the processor sells end products at a net 
price that provides a discount from the commercial case price for the 
value of the donated foods contained in the end products. We propose to 
permit end product sales under this system in the proposed Sec.  
250.36(c). We propose to refer to this system as a direct discount 
system to distinguish it from the method of end product sales described 
in the following paragraph.
    In current Sec.  250.30(e)(1)(ii), a distributor may sell end 
products to the distributing or recipient agency, as appropriate, at a 
net price that provides a discount from the commercial case price for 
the value of the donated foods contained in the end products. The 
processor then compensates the distributor for the discount provided 
for the value of the donated food in its sale of end products. We 
propose to permit end product sales under this system in the proposed 
Sec.  250.36(d), and to refer to it as the indirect discount system. We 
propose to require the processor to ensure that the distributor notify 
it of such sales, at least on a monthly basis, through automated sales 
reports or other submission. We propose to remove the requirement, in 
current Sec.  250.30(k)(2), that the distributor apply to the processor 
for a refund under this system.
    In current Sec.  250.30(d)(2), and in accordance with the 
definition in current Sec.  250.2, the processor may sell end products 
to the distributing or recipient agency at a ``fee-for-service.'' The 
fee-for-service includes all costs to produce the end product minus the 
value of the donated food put into production. The processor must 
identify any charge for delivery of end products separately from the 
fee-for-service on its invoice. We propose to permit this method of end 
product sales in the proposed Sec.  250.36(e).
    In current Sec.  250.30(e)(1)(iv), the processor may provide end 
products sold under a fee-for-service system to a distributor for 
delivery to the distributing or recipient agency. In such cases, the 
processor must identify the distributor's delivery charge separately 
from the fee-for-service on its invoice or may permit the distributor 
to bill the distributing or recipient agency separately for the 
delivery of end products. As a matter of policy, we have also permitted 
the processor to provide written approval to the distributing or 
recipient agency-contracted distributor to bill the distributing or 
recipient agency, as appropriate, for the total case price--i.e., for 
the fee-for-service and the delivery charge. In such cases, the 
processor must ensure that the appropriate agency has advance 
notification of the fee-for-service and delivery charge. The processor 
must require that the distributor notify it of such sales, at least on 
a monthly basis, through automated sales reports or other submission, 
which may include email or other electronic means. We propose to 
include these requirements in the proposed Sec.  250.36(e).
    In current Sec.  250.30(d)(1)(iii), the processor may sell end 
products to the distributing or recipient agency under an alternate 
method of end product

[[Page 1242]]

sales that is approved by FNS and the distributing agency. In current 
Sec.  250.30(e)(1)(iii), the distributor may also sell end products 
under such an approved alternate method of sales. Such alternate 
methods of sale must ensure that the distributing or recipient agency, 
as appropriate, receives credit for the value of donated foods 
contained in the end products. We propose to include this option for 
both processor and distributor in the proposed Sec.  250.36(f).
    In the proposed Sec.  250.36(g), we propose to clarify that the 
contract value of the donated foods must be used in crediting for 
donated foods in end product sales and to refer to the definition of 
contract value included in current Sec.  250.2. In the proposed Sec.  
250.36(h), we would require that the distributing agency provide the 
processor with a list of recipient agencies eligible to purchase end 
products along with the quantity of raw donated food that is to be 
delivered to the processor for processing on behalf of each recipient 
agency. This would ensure that only eligible recipient agencies receive 
end products, and in the amounts for which they are eligible. For end 
products sold through distributors, we propose to require that the 
processor provide the distributor with a list of eligible recipient 
agencies and either the quantities of approved end products that each 
recipient agency is eligible to receive, or the quantity of donated 
food allocated to each recipient agency along with the raw donated food 
(pounds or cases) needed per case of each approved end product.
8. Reports, Records, and Reviews of Processor Performance, Sec.  250.37
    In the proposed Sec.  250.37, we propose to include the reporting 
and recordkeeping requirements for the processing of donated foods, and 
the use of such reports and records to review processor performance. In 
current Sec.  250.30(m), the processor must submit a monthly 
performance report to the distributing agency, including the following 
information for the reporting period, with year-to-date totals:
    (1) A list of all eligible recipient agencies receiving end 
products;
    (2) The quantity of donated foods on hand at the beginning of the 
reporting period;
    (3) The quantity of donated foods received;
    (4) The quantity of donated foods transferred to the processor from 
another entity, or transferred by the processor to another entity;
    (5) The quantity of end products delivered to each eligible 
recipient agency; and
    (6) The quantity of donated foods remaining at the end of the 
reporting period.
    In the proposed Sec.  250.37(a), we propose to retain the 
requirement that the processor submit the performance report to the 
distributing agency (or to the recipient agency, in accordance with a 
Recipient Agency Processing Agreement) on a monthly basis. We propose 
to retain all of the currently required information in the report. We 
propose to require the processor to include quantities of donated food 
losses. We propose to require that the processor also include grading 
certificates and other documentation, as requested by the distributing 
agency, to support the information included in the performance reports. 
Such documentation may include, for example, bills of lading, invoices 
or copies of refund payments to verify sales and delivery of end 
products to recipient agencies. We propose to retain the current 
deadlines for the submission of performance reports in the proposed 
Sec.  250.37(a).
    In the proposed Sec.  250.37(b), we would require that the 
processor must include reductions in donated food inventories on 
monthly performance reports only after sales of end products have been 
made, or after sales of end products through distributors have been 
documented. We propose to require that, when a distributor sells end 
products under a refund system, such documentation must be through the 
distributing or recipient agency's request for a refund (under a refund 
system) or through the distributor's automated sales reports or other 
electronic or written submission (under an indirect discount system or 
under fee-for-service).
    In the proposed Sec.  250.37(c), we would require that a multi-
State processor submit a summary performance report to FNS, on a 
monthly basis and in a standard format established by FNS, containing 
information from the performance report that would allow FNS to track 
the processor's total and State-by-State donated food inventories. The 
purpose of this report is to assess the amount of the performance bond 
or letter of credit required of the processor under its National 
Processing Agreement. However, each distributing agency would still be 
responsible for monitoring the multi-State processor's inventory of 
donated foods received for processing in the respective State, in 
accordance with the proposed Sec.  250.37(a).
    In the proposed Sec.  250.37(d), we would require processors to 
maintain specific records to demonstrate compliance with processing 
requirements in 7 CFR part 250, including, for example, assurance of 
receipt of donated food shipments, production, sale, and delivery of 
end products, and crediting for donated foods contained in end 
products.
    In accordance with current Sec.  250.19(a), accurate and complete 
records must be maintained with respect to end products processed from 
donated foods. In the proposed Sec.  250.37(e), we would require 
distributing agencies to maintain specific records to demonstrate 
compliance with processing requirements in 7 CFR Part 250, including, 
for example, end product data schedules, performance reports, copies of 
audits, and documentation of the correction of any deficiencies 
identified in such audits.
    In the proposed Sec.  250.37(f), we would require that recipient 
agencies maintain specific records to demonstrate compliance with 
processing requirements in 7 CFR part 250, including, for example, the 
receipt of end products purchased from processors or distributors, 
crediting for the value of donated foods included in end products, and 
procurement documents.
    In accordance with current Sec.  250.18(b), the distributing agency 
must make a continuing evaluation of processors and recipient agencies, 
through the review of performance reports and other reports and 
records, to ensure compliance with the requirements of 7 CFR part 250. 
And, in accordance with current Sec.  250.30(m)(3), the distributing 
agency must review and analyze reports submitted by processors to 
ensure compliance with such requirements. We propose to clarify the 
review requirements for the distributing agency in the proposed Sec.  
250.37(g), including the review of performance reports to ensure that 
the processor:
    (1) Receives donated food shipments, as applicable;
    (2) Delivers end products to eligible recipient agencies, in the 
types and quantities for which they are eligible;
    (3) Meets the required processing yields for donated foods; and
    (4) Accurately reports donated food inventory activity and 
maintains inventories within approved levels.
    We propose to remove the requirements in current Sec.  250.30(m)(2) 
and (n)(2) relating to the submission of reports and the performance of 
reviews to ensure that substitution of concentrated skim milk for 
donated nonfat dry milk is in compliance with requirements. Donated 
nonfat dry milk

[[Page 1243]]

is no longer available for donation to schools.
9. Provisions of Agreements, Sec.  250.38
    In the proposed Sec.  250.38, we include the required provisions 
for each type of processing agreement included in the proposed Sec.  
250.30, to ensure compliance with the requirements in 7 CFR part 250. 
In the proposed Sec.  250.38(a), we propose to establish that the 
National Processing Agreement is inclusive of all provisions necessary 
to ensure that a multi-State processor complies with all applicable 
requirements relating to the processing of donated foods. FNS has 
developed a prototype National Processing Agreement that includes all 
such required provisions.
    In the proposed Sec.  250.38(b), we would require that the State 
Participation Agreement with a multi-State processor contain specific 
provisions or attachments to assure compliance with requirements in 7 
CFR part 250 that are not included in the multi-State processor's 
National Processing Agreement. Such provisions include, for example, a 
list of recipient agencies eligible to receive end products, summary 
end product data schedules that contain a list of end products that may 
be sold in the State, a requirement that processors enter into a 
written agreement with distributors handling end products containing 
donated foods, and the allowed method(s) of end product sales 
implemented by the distributing agency.
    In the proposed Sec.  250.38(c), we would require that the In-State 
Processing Agreement contain specific provisions or attachments to 
assure compliance with requirements in 7 CFR part 250. Most of these 
provisions are included in current Sec.  250.30(c)(5) and include, for 
example, assurance that the processor will meet processing yields for 
donated foods and substitution requirements, report donated food 
inventory activity and maintain inventories within approved levels, 
enter into a written agreement with distributors handling end products 
containing donated foods, credit recipient agencies for the value of 
all donated foods contained in end products, and obtain required 
audits.
    In accordance with the proposed Sec.  250.38(d), we propose to 
require that the Recipient Agency Processing Agreement contain the same 
provisions as an In-State Processing Agreement, to the extent that the 
distributing agency permits the recipient to perform activities 
normally performed by the distributing agency under an In-State 
Processing Agreement (e.g., approval of end product data schedules or 
review of performance reports). However, a list of recipient agencies 
eligible to receive end products need not be included.
    In the proposed Sec.  250.38(e), we propose to prohibit a 
distributing or recipient agency, as appropriate, from extending or 
renewing an agreement when a processor has not complied with processing 
requirements. We propose to allow a distributing or recipient agency to 
immediately terminate an agreement in the event of such noncompliance.
10. Miscellaneous Provisions, Sec.  250.39
    In current Sec.  250.30(q), FNS may waive any of the requirements 
in 7 CFR part 250 for the purpose of conducting demonstration projects 
to test program changes which might improve processing of donated 
foods. We propose to include this provision with minimal change in the 
proposed Sec.  250.39(a).
    In the proposed Sec.  250.39(b), we propose to retain the 
requirement in current Sec.  250.30(p) that the distributing agency 
develop and provide a processing manual or similar materials to 
processors and other parties to ensure sufficient guidance is given to 
processors and other parties to permit compliance with requirements for 
the processing of donated foods. Consistent with the current 
demonstration project, the distributing agency would be permitted to 
provide additional information relating to State-specific processing 
procedures upon request.
    In the proposed Sec.  250.39(c), we propose to clarify that 
guidance or information relating to the processing of donated foods is 
included on the FNS Web site or may otherwise be obtained from FNS. 
Such guidance and information includes program regulations and 
policies, the FNS Audit Guide, and the USDA National Processing 
Agreement.

III. Procedural Matters

A. Executive Order 12866 and 13563

    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility.
    This proposed rule has been determined to be not significant and 
was not reviewed by the Office of Management and Budget (OMB) in 
conformance with Executive Order 12866.

B. Regulatory Impact Analysis

    This rule has been designated as not significant by the Office of 
Management and Budget, therefore, no Regulatory Impact Analysis is 
required.

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601-612) requires Agencies 
to analyze the impact of rulemaking on small entities and consider 
alternatives that would minimize any significant impacts on a 
substantial number of small entities. Pursuant to that review, the 
Administrator of FNS has certified that this rule would not have a 
significant impact on a substantial number of small entities.

D. Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public 
Law 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local and tribal 
governments and the private sector. Under section 202 of the UMRA, the 
Department generally must prepare a written statement, including a cost 
benefit analysis, for proposed and final rules with ``Federal 
mandates'' that may result in expenditures by State, local or Tribal 
governments, in the aggregate, or the private sector, of $146 million 
or more (when adjusted for inflation; GDP deflator source: Table 1.1.9 
at http://www.bea.gov/iTable) in any one year. When such a statement is 
needed for a rule, Section 205 of the UMRA generally requires the 
Department to identify and consider a reasonable number of regulatory 
alternatives and adopt the most cost effective or least burdensome 
alternative that achieves the objectives of the rule.
    This proposed rule does not contain Federal mandates (under the 
regulatory provisions of Title II of the UMRA) for State, local, and 
Tribal governments or the private sector of $146 million or more in any 
one year. Thus, the rule is not subject to the requirements of sections 
202 and 205 of the UMRA.

E. Executive Order 12372

    The donation of foods in USDA food distribution and child nutrition 
programs is included in the Catalog of Federal Domestic Assistance 
under 10.555, 10.558, 10.559, 10.565, 10.567, and 10.569 is subject to 
Executive Order 12372, which requires intergovernmental consultation 
with State and local officials. (See 2 CFR chapter IV)

[[Page 1244]]

F. Federalism Summary Impact Statement

    Executive Order 13132 requires Federal agencies to consider the 
impact of their regulatory actions on State and local governments. 
Where such actions have federalism implications, agencies are directed 
to provide a statement for inclusion in the preamble to the regulations 
describing the agency's considerations in terms of the three categories 
called for under Section (6)(b)(2)(B) of Executive Order 13121.
    The Department has considered the impact of this rule on State and 
local governments and has determined that this rule does not have 
federalism implications. Therefore, under section 6(b) of the Executive 
Order, a federalism summary is not required.

G. Civil Rights Impact Analysis

    FNS has reviewed this proposed rule in accordance with USDA 
Regulation 4300-4, ``Civil Rights Impact Analysis,'' to identify any 
major civil rights impacts the rule might have on program participants 
on the basis of age, race, color, national origin, sex or disability. 
After a careful review of the rule's intent and provisions, FNS has 
determined that this rule would not in any way limit or reduce the 
ability of participants to receive the benefits of donated foods in 
food distribution or child nutrition programs on the basis of an 
individual's or group's race, color, national origin, sex, age, or 
disability. FNS found no factors that would negatively and 
disproportionately affect any group of individuals.

H. Executive Order 13175

    Executive Order 13175 requires Federal agencies to consult and 
coordinate with Tribes on a government-to-government basis on policies 
that have Tribal implications, including regulations, legislative 
comments or proposed legislation, and other policy statements or 
actions that have substantial direct effects on one or more Indian 
Tribes, on the relationship between the Federal Government and Indian 
Tribes, or on the distribution of power and responsibilities between 
the Federal Government and Indian Tribes. FNS consulted with Tribes on 
this proposed rule on November 19, 2014, however no concerns or 
comments were received. We are unaware of any current Tribal laws that 
could be in conflict with the final rule.

I. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995, this notice 
invites the general public and other public agencies to comment on this 
proposed information collection. This collection is a revision of a 
currently approved collection, OMB#0584-0293.
    Written comments must be received on or before March 6, 2017. 
Comments are invited on: (a) Whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the agency, including whether the information shall have practical 
utility; (b) the accuracy of the agency's estimate of the burden of the 
proposed collection of information, including the validity of the 
methodology and assumptions that were used; (c) ways to enhance the 
quality, utility, and clarity of the information to be collected; and 
(d) ways to minimize the burden of the collection of information on 
those who are to respond, including use of appropriate automated, 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology.
    Comments will be accepted through the Federal eRulemaking Portal. 
Go to http://www.regulations.gov, and follow the online instructions 
for submitting comments electronically. Comments may also be sent to 
Kiley Larson, at the address listed in the ADDRESSES section of this 
preamble. Commenters are asked to separate their comments on the 
information collection requirements from their comments on the proposed 
rule.
    Title: Food Distribution Forms.
    OMB Number: 0584-0293.
    Expiration Date: 11/30/2016.
    Type of Request: Revision of a currently approved collection.
    Abstract: This is a revision of an existing information collection 
based on this proposed rule, Revisions and Clarifications in 
Requirements for the Processing of Donated Foods. The rule proposes to 
add reporting requirements to the existing information collection 
associated with 7 CFR part 250, OMB Number 0584-0293 as follows:
New Reporting Requirements Associated With This Rulemaking
     Sec.  250.37(c), Summary Performance Report. Multi-State 
processors submit a summary performance report to FNS. The summary 
performance report lists the complete donated food inventory at the 
beginning and end of the reporting month and the total donated food 
inventory by State and the national total. Approximately 110 
respondents are expected to submit 12 summary performance reports per 
year. Each performance report is expected to take 1 hour to complete, 
for a total annual burden of 1320.00 hours.
     Sec.  250.30(i), Agreements between Processors and 
Distributors. A processor providing end products containing donated 
foods to a distributor must enter into a written agreement with the 
distributor. The agreement must include the financial liability for the 
replacement value of donated foods, monthly end product sales reporting 
frequency, requirements under 250.11, and the applicable value pass 
through system. These agreements can be considered permanent, with 
amendments made as necessary. We estimate that 225 respondents will 
enter into an agreement in the first year and 5 will amend their 
agreements each year for the next 2 years, with 2.0 hours per response. 
The estimated annual reporting burden for this activity is 156.66 
hours.
     Sec.  250.33(a), End Product Data Schedules. Processors 
must submit end product data schedules, in a standard electronic form 
dictated by FNS for approval by FNS (for National Processing 
Agreements) or by the State distributing agency (for In-State 
Processing Agreements) for each new product that a processor wishes to 
provide or for a previously approved end product in which the 
ingredients have been altered. All products containing donated red meat 
and poultry must have their end product data schedules approved by 
USDA. The end product data schedule must include a description of the 
end product, the donated foods and other ingredients included in the 
end product, the quantity of the end product produced, and the 
processing yield of the donated food. We expect 131 processors to 
provide end product data schedules to FNS or the State distributing 
agency 12 times a year. The estimated time for each response is 0.5 
hours, for a total of 786 burden hours.
    In addition to the above reporting requirements, FNS has reviewed 
the information collection associated with 7 CFR part 250 and 
determined that several reporting and recordkeeping requirements 
require update due to changes in historical averages and/or duplicate 
counting. Those adjustments result in a net burden reduction of 5,177 
hours. The table below summarizes the changes to the burden for OMB 
Number 0584-0293. For additional details, see the information 
collection material included in the docket to this rule.

[[Page 1245]]



--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                  Number of                          Estimated total
                     Affected public                        Estimated number    responses per       Total annual        hours per       Estimated total
                                                             of respondents       respondent         responses           response            burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Reporting
--------------------------------------------------------------------------------------------------------------------------------------------------------
State, Local, and Tribal Governments.....................             20,866              11.13         232,319.24               0.25          58,679.50
Private For Profit.......................................              2,812             306.43         861,681.33               0.03          26,093.88
Private Not for Profit...................................              1,600               2.03           3,240.00               0.19             614.50
Individual...............................................         611,200.00               1.96       1,199,200.00               0.25         304,400.00
                                                          ----------------------------------------------------------------------------------------------
    Total Estimated Reporting Burden.....................         636,478.00               3.61       2,296,440.57               0.17         389,787.88
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Recordkeeping
--------------------------------------------------------------------------------------------------------------------------------------------------------
State, Local, and Tribal Governments.....................          20,866.00              22.58         471,130.46               0.08          35,413.02
Private For Profit.......................................              2,812             367.86       1,034,429.00               0.06          62,671.72
Private Not for Profit...................................              1,600               7.99          12,782.00              52.63         672,662.29
Individual...............................................                  0               0.00               0.00               0.00               0.00
                                                          ----------------------------------------------------------------------------------------------
    Total Estimated Recordkeeping Burden.................          25,278.00              60.07       1,518,341.46               0.51         770,747.03
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                          Total of Reporting and Recordkeeping
--------------------------------------------------------------------------------------------------------------------------------------------------------
Reporting................................................         636,478.00               3.61       2,296,440.57               0.17         389,787.88
Recordkeeping............................................          25,278.00              60.07       1,518,341.46               0.51         770,747.03
                                                          ----------------------------------------------------------------------------------------------
    Total................................................         636,478.00               5.99       3,814,782.03               0.30       1,160,534.91
--------------------------------------------------------------------------------------------------------------------------------------------------------

J. E-Government Act Compliance

    The Department is committed to complying with the E-Government Act, 
to promote the use of the Internet and other information technologies 
to provide increased opportunities for citizen access to Government 
information and services, and for other purposes.

List of Subjects in 7 CFR Part 250

    Administrative practice and procedure, Food assistance programs, 
Grant programs, Social programs, Reporting and recordkeeping 
requirements, Surplus agricultural commodities.

    Accordingly, 7 CFR part 250 is proposed to be amended as follows:

PART 250--DONATION OF FOODS FOR USE IN THE UNITED STATES, ITS 
TERRITIORIES AND POSSESSIONS AND AREAS UNDER ITS JURISDICTION

0
1. The authority citation for Part 250 continues to read as follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 612c, 612c note, 1431, 1431b, 
1431e, 1431 note, 1446a-1, 1859, 2014, 2025; 15 U.S.C. 713c; 22 
U.S.C. 1922; 42 U.S.C. 1751, 1755, 1758, 1760, 1761, 1762a, 1766, 
3030a, 5179, 5180.

0
2. In Sec.  250.2:
0
a. Remove definitions of Contracting agency and Fee-for-service.
0
b. Add definitions in alphabetical order for Backhauling, Commingling, 
End product data schedule, In-State Processing Agreement, National 
Processing Agreement, Recipient Agency Processing Agreement, 
Replacement value, and State Participation Agreement.
    The revisions and additions read as follows:


Sec.  250.2  Definitions.

* * * * *
    Backhauling means the delivery of donated foods to a processor for 
processing from a distributing or recipient agency's storage facility.
* * * * *
    Commingling means the storage of donated foods together with 
commercially purchased foods.
* * * * *
    End product data schedule means a processor's description of its 
processing of donated food into a finished end product, including the 
processing yield of donated food.
* * * * *
    In-State Processing Agreement means a distributing agency's 
agreement with an in-State processor to process donated foods into 
finished end products for sale to eligible recipient agencies or for 
sale to the distributing agency.
* * * * *
    National Processing Agreement means an agreement between FNS and a 
multi-State processor to process donated foods into end products for 
sale to distributing or recipient agencies.
* * * * *
    Recipient Agency Processing Agreement means a recipient agency's 
agreement with a processor to process donated foods and to purchase the 
finished end products.
* * * * *
    Replacement value means the price assigned by the Department to a 
donated food which must reflect the current price in the market to 
ensure compensation for donated foods lost in processing or other 
activities. The replacement value may be changed by the Department at 
any time.
* * * * *
    State Participation Agreement means a distributing agency's 
agreement with a multi-State processor to permit the sale of finished 
end products produced under the processor's National Processing 
Agreement to eligible recipient agencies in the State or to directly 
purchase such finished end products.
* * * * *
0
3. In Sec.  250.11, revise paragraph (e) to read as follows:


Sec.  250.11  Delivery and receipt of donated food shipments.

* * * * *
    (e) Transfer of title. In general, title to donated foods transfers 
to the distributing agency or recipient agency, as appropriate, upon 
acceptance of the donated foods at the time and place of delivery. 
Title to donated foods provided to a multi-State processor, in 
accordance with its National Processing Agreement, transfers to the 
distributing agency or recipient agency, as appropriate, upon 
acceptance of the finished end products at the time and

[[Page 1246]]

place of delivery. However, when a recipient agency has contracted with 
a distributor to act as an authorized agent, title to finished end 
products containing donated foods transfers to the recipient agency 
upon delivery and acceptance by the contracted distributor. 
Notwithstanding transfer of title, distributing and recipient agencies 
must ensure compliance with the requirements of this part in the 
distribution, control, and use of donated foods.
* * * * *
0
4. In Sec.  250.18, revise paragraph (b) to read as follows:


Sec.  250.18  Reporting requirements.

* * * * *
    (b) Processor performance. Processors must submit performance 
reports and other supporting documentation, as required by the 
distributing agency or by FNS, in accordance with Sec.  250.37(a), to 
ensure compliance with requirements in this part.
* * * * *
0
5. In Sec.  250.19, revise paragraph (a) to read as follows:


Sec.  250.19  Recordkeeping requirements.

    (a) Required records. Distributing agencies, recipient agencies, 
processors, and other entities must maintain records of agreements and 
contracts, reports, audits, and claim actions, funds obtained as an 
incident of donated food distribution, and other records specifically 
required in this part or in other Departmental regulations, as 
applicable. In addition, distributing agencies must keep a record of 
the value of donated foods each of its school food authorities 
receives, in accordance with Sec.  250.58(e), and records to 
demonstrate compliance with the professional standards for distributing 
agency directors established in Sec.  235.11(g) of this chapter. 
Processors must also maintain records documenting the sale of end 
products to recipient agencies, including the sale of such end products 
by distributors, and must submit monthly performance reports, in 
accordance with Subpart C of this part and with any other recordkeeping 
requirements included in their agreements. Specific recordkeeping 
requirements relating to the use of donated foods in contracts with 
food service management companies are included in Sec.  250.54. Failure 
of the distributing agency, recipient agency, processor, or other 
entity to comply with recordkeeping requirements must be considered 
prima facie evidence of improper distribution or loss of donated foods 
and may result in a claim against such party for the loss or misuse of 
donated foods, in accordance with Sec.  250.16, or in other sanctions 
or corrective actions.
* * * * *
0
6. Revise Subpart C to read as follows:
Subpart C--Processing of Donated Foods
Sec.
250.30 Processing of donated foods into end products.
250.31 Procurement requirements.
250.32 Protection of donated food value.
250.33 Ensuring processing yields of donated foods.
250.34 Substitution of donated foods.
250.35 Storage, food safety, 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.

Subpart C--Processing of Donated Foods


Sec.  250.30  Processing of donated foods into end products.

    (a) Purpose of processing donated foods. Donated foods are most 
commonly provided to processors to process into approved end products 
for use in school lunch programs or other food services provided by 
recipient agencies. The ability to divert donated foods for processing 
provides recipient agencies with more options for using donated foods 
in their programs. For example, donated foods such as whole chickens or 
chicken parts may be processed into precooked grilled chicken strips 
for use in the National School Lunch Program. In some cases, donated 
foods are provided to processors to prepare meals or for repackaging. A 
processor's use of a commercial facility to repackage donated foods, or 
to use donated foods in the preparation of meals, is considered 
processing in this part.
    (b) Agreement requirement. The 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 allowed 
by the distributing agency, between the processor and a recipient 
agency or subdistributing agency. However, a processing agreement will 
not obligate any party to provide donated foods to a processor for 
processing. The agreements described below are required in addition to, 
not in lieu of, competitively procured contracts required in accordance 
with Sec.  250.31. The processing agreement must be signed by an 
authorized individual for the processor. The different types of 
processing agreements are described in this section.
    (c) National Processing Agreement. A multi-State processor must 
enter into a National Processing Agreement with FNS in order to process 
donated foods into end products in accordance with end product data 
schedules approved by FNS. FNS also holds and manages such processor's 
performance bond or letter of credit under its National Processing 
Agreement, in accordance with Sec.  250.32. FNS does not itself procure 
or purchase end products under a National Processing Agreement. A 
multi-State processor must also enter into a State Participation 
Agreement with the distributing agency in order to sell nationally 
approved end products in the State, in accordance with paragraph (d) of 
this section.
    (d) State Participation Agreement. The distributing agency must 
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 to eligible recipient agencies in the 
State or to directly purchase such end products. The distributing 
agency may include other State-specific processing requirements in its 
State Participation Agreement, such as the methods of end product sales 
permitted, in accordance with Sec.  250.36, or the use of labels 
attesting to fulfillment of meal pattern requirements in child 
nutrition programs. The distributing agency must utilize the following 
criteria in its selection of processors with which it enters into 
agreements. These criteria will be reviewed by the appropriate FNS 
Regional Office during the management evaluation review of the 
distributing agency.
    (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 and integrity, and capacity to 
meet regulatory requirements.
    (e) In-State Processing Agreement. A distributing agency must enter 
into an In-State Processing Agreement with an in-State processor to 
process donated foods into finished end products, unless it permits 
recipient agencies to enter into Recipient Agency Processing Agreements 
for such purpose, in accordance with paragraph (f) of this section. 
Under an In-State Processing

[[Page 1247]]

Agreement, the distributing agency approves end product data schedules 
(except red meat and poultry) submitted by the processor, holds and 
manages the processor's performance bond or letter of credit, in 
accordance with Sec.  250.32, and assures compliance with other 
processing requirements. The distributing agency may also purchase the 
finished end products for distribution to eligible recipient agencies 
in the State under an In-State Processing Agreement, or may permit 
recipient agencies to purchase such end products, in accordance with 
applicable procurement requirements. In the latter case, the In-State 
Processing Agreement is often called a ``master agreement.'' A 
distributing agency that procures end products on behalf of recipient 
agencies, or that limits recipient agencies' access to the procurement 
of specific end products through its master agreements, must utilize 
the following criteria in its selection of processors with which it 
enters into agreements. These criteria will be reviewed by the 
appropriate FNS Regional Office during the management evaluation review 
of the distributing agency:
    (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 and integrity, and capacity to 
meet regulatory requirements.
    (f) Recipient Agency Processing Agreement. The distributing agency 
may permit a recipient agency to enter into an agreement with an in-
State processor to process donated foods and to purchase the finished 
end products in accordance with a Recipient Agency Processing 
Agreement. A recipient agency may also enter into a Recipient Agency 
Processing Agreement on behalf of other recipient agencies, in 
accordance with an agreement between the parties. The distributing 
agency may also delegate a recipient agency to approve end product data 
schedules or select nationally approved end product data schedules, 
review in-State processor performance reports, manage the performance 
bond or letter of credit of an in-State processor, and monitor other 
processing activities under a Recipient Agency Processing Agreement. 
All such activities must be performed in accordance with the 
requirements of this part. All Recipient Agency Processing Agreements 
must be reviewed and approved by the distributing agency. All recipient 
agencies must utilize the following criteria in its selection of 
processors with which it enters into agreements:
    (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 and integrity, and capacity to 
meet regulatory requirements.
    (g) Ensuring acceptability of end products. A distributing agency 
that procures end products on behalf of recipient agencies, or that 
otherwise limits recipient agencies' access to the procurement of 
specific end products, must provide for testing of end products to 
ensure their acceptability by recipient agencies, prior to entering 
into processing agreements. End products that have previously been 
tested, or that are otherwise determined to be acceptable, need not be 
tested. However, such a distributing agency must monitor product 
acceptability on an ongoing basis.
    (h) Prohibition against subcontracting. A processor may not assign 
any processing activities under its processing agreement or subcontract 
to another entity to perform any aspect of processing, without the 
specific written consent of the other party to the agreement (i.e., 
distributing or recipient agency, or FNS, as appropriate). The 
distributing agency may, for example, provide the required consent as 
part of its State Participation Agreement or In-State Processing 
Agreement with the processor.
    (i) Agreements between Processors and Distributors. A processor 
providing end products containing donated foods to a distributor must 
enter into a written agreement with the distributor. The agreement must 
reference, at a minimum, the financial liability (i.e., who must pay) 
for the replacement value of donated foods, not less than monthly end 
product sales reporting frequency, requirements under Sec.  250.11, and 
the applicable value pass through system to ensure that the value of 
donated foods and finished end products are properly credited to 
recipient agencies. Distributing agencies can set additional 
requirements.
    (j) Duration of agreements. An agreement between a distributing, or 
recipient agency and a processor may be up to five years in duration. 
National Processing Agreements are permanent. Amendments to any 
agreements may be made, as needed, with the concurrence of both parties 
to the agreement. Such amendments will be effective for the duration of 
the agreement, unless otherwise indicated.


Sec.  250.31  Procurement requirements.

    (a) Applicability of Federal procurement requirements. Distributing 
and recipient agencies must comply with the requirements in 2 CFR part 
200 and part 400, as applicable, in purchasing end products, 
distribution, or other processing services from processors. 
Distributing and recipient agencies may use procurement procedures that 
conform to applicable State or local laws and regulations, but must 
ensure compliance with the procurement requirements in 2 CFR parts 200 
and 400, as applicable.
    (b) Required information in procurement documents. In all 
procurements of processed end products containing USDA donated foods, 
procurement documents must include the following information:
    (1) The price to be charged for the end product or other processing 
service;
    (2) The method of end product sales that will be utilized and 
assurance that crediting for donated foods will be performed in 
accordance with the applicable requirements for such method of sales in 
Sec.  250.36;
    (3) The value of the donated food in the end products; and
    (4) The location for the delivery of the end products.


Sec.  250.32  Protection of donated food value.

    (a) Performance bond or irrevocable letter of credit. The processor 
must obtain a performance bond or an irrevocable letter of credit to 
protect the value of donated foods to be received for processing prior 
to the delivery of the donated foods to the processor. The processor 
must provide the performance bond or letter of credit to the 
distributing or recipient agency, in accordance with its In-State or 
Recipient Agency Processing Agreement. However, a multi-State processor 
must provide the performance bond or letter of credit to FNS, in 
accordance with its National Processing Agreement. For multi-State 
processors, the minimum amount of the performance bond or letter of 
credit must be sufficient to cover at least 75 percent of the value of 
donated foods in the processor's physical or book inventory, as 
determined annually and at the discretion of FNS for processors under

[[Page 1248]]

National Processing Agreements. For multi-state processors in their 
first year of participation in the processing program, the amount of 
the performance bond or letter of credit must be sufficient to cover 
100 percent of the value of donated foods, as determined annually, and 
at the discretion of FNS. The surety company from which a bond is 
obtained must be listed in the most current Department of Treasury's 
Listing of Approved Sureties (Department Circular 570).
    (b) Calling in the performance bond or letter of credit. The 
distributing or recipient agency must call in the performance bond or 
letter of credit whenever a processor's lack of compliance with this 
part, or with the terms of the In-State or Recipient Agency Processing 
Agreement, results in a loss of donated foods to a distributing or 
recipient agency and the processor fails to make restitution or respond 
to a claim action initiated to recover the loss. Similarly, FNS will 
call in the performance bond or letter of credit in the same 
circumstances, in accordance with National Processing Agreements, and 
will ensure that any monies recovered are reimbursed to distributing 
agencies for losses of entitlement foods.


Sec.  250.33  Ensuring processing yields of donated foods.

    (a) End product data schedules. The processor must submit an end 
product data schedule, in a standard electronic format dictated by FNS, 
for approval before it may process donated foods into end products. For 
In-State Processing Agreements, the end product data schedule must be 
approved by the distributing agency and, for products containing 
donated red meat and poultry, the end product data schedule must also 
be approved by the Department. For National Processing Agreements, the 
end product data schedule must be approved by the Department. 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. On the end product data schedule, the processor must 
describe its processing of donated food into an end product, including 
the following information:
    (1) A description of the end product;
    (2) The types and quantities of donated foods included;
    (3) The types and quantities of other ingredients included;
    (4) The quantity of end product produced; and
    (5) The processing yield of donated food, which may be expressed as 
the quantity (pounds or cases) of donated food 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.
    (b) Processing yields of donated foods. All end products must have 
a processing yield of donated foods associated with its production and 
this processing yield must be indicated on its end product data 
schedule. The processing yield options are limited to 100 percent 
yield, guaranteed yield, and standard yield.
    (1) Under 100 percent yield, the processor must ensure that 100 
percent of the raw donated food is returned in the finished end 
product. The processor must replace any processing loss of donated food 
with commercially purchased food of the same generic identity, of U.S. 
origin, and equal or better in all USDA procurement specifications than 
the donated food. The processor must demonstrate such replacement by 
reporting reductions in donated food inventories on performance reports 
by the amount of donated food contained in the finished end product 
rather than the amount that went into production. The Department may 
approve an exception if a processor experiences a significant 
manufacturing loss.
    (2) Under guaranteed yield, the processor must ensure that a 
specific quantity of end product (i.e., number of cases) will be 
produced from a specific quantity of donated food, as determined by the 
parties to the processing agreement, and, for In-State Processing 
Agreements, approved by the Department. If necessary, the processor 
must use commercially purchased food of the same generic identity, of 
U.S. origin, and equal or better in all USDA procurement specifications 
than the donated food to provide the guaranteed number of cases of end 
product to the distributing or recipient agency, as appropriate. The 
guaranteed yield must be indicated on the end product data schedule.
    (3) Under standard yield, the processor must ensure that a specific 
quantity of end product (i.e., number of cases), as determined by the 
Department, will be produced from a specific quantity of donated food. 
The established standard yield is higher than the yield the processor 
could achieve under normal commercial production and serves to reward 
those processors that can process donated foods most efficiently. If 
necessary, the processor must use commercially purchased food of the 
same generic identity, of U.S. origin, and equal or better in all USDA 
procurement specifications than the donated food to provide the number 
of cases required to meet the standard yield to the distributing or 
recipient agency, as appropriate. The standard yield must be indicated 
on the end product data schedule.
    (c) Compensation for loss of donated foods. The processor must 
compensate the distributing or recipient agency, as appropriate, for 
the loss of donated foods, or for the loss of commercially purchased 
foods substituted for donated foods. Such loss may occur, for example, 
if the processor fails to meet the required processing yield of donated 
food or fails to produce end products that meet required 
specifications, if donated foods are spoiled, damaged, or otherwise 
adulterated at a processing facility, or if end products are improperly 
distributed. To compensate for such loss, the processor must:
    (1) Replace the lost donated food or commercial substitute with 
commercially purchased food of the same generic identity, of U.S. 
origin, and equal or better in all USDA procurement specifications than 
the donated food; or
    (2) Return end products that are wholesome but do not meet required 
specifications to production for processing into the requisite quantity 
of end products that meet the required specifications (commonly called 
rework products); or
    (3) If the purchase of replacement foods or the reprocessing of 
products that do not meet the required specifications is not feasible, 
the processor may, with FNS, distributing agency, or recipient agency 
approval, dependent on which entity maintains the agreement with the 
processor, pay the distributing or recipient agency, as appropriate, 
for the replacement value of the donated food or commercial substitute.
    (d) Credit for sale of by-products. The processor must credit the 
distributing or recipient agency, as appropriate, for the sale of any 
by-products produced in the processing of donated foods. The processor 
must credit for the net value of such sale, or the market value of the 
by-products, after subtraction of any documented expenses incurred in 
preparing the by-product for sale. Crediting must be achieved through 
invoice reduction or by another means of crediting.
    (e) Labeling requirements. The processor must ensure that all end 
product labels meet Federal labeling

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requirements. A processor that claims end products fulfill meal pattern 
requirements in child nutrition programs must comply with the 
procedures required for approval of labels of such end products.


Sec.  250.34  Substitution of donated foods.

    (a) Substitution of commercially purchased foods for donated foods. 
Unless its agreement specifically stipulates that the donated foods 
must be used in processing, the processor may substitute commercially 
purchased foods for donated foods that are delivered to it 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 donated food. Commercially purchased beef, 
pork, or poultry must meet the same specifications as donated product, 
including inspection, grading, testing, and humane handling standards 
and must be approved by the Department 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 if, due to changing market conditions or other reasons, the 
Department's purchase of donated foods and their delivery to the 
processor is not feasible. Commercially purchased food substituted for 
donated food must meet the same processing yield requirements in Sec.  
250.33 that would be required for the donated food.
    (b) Prohibition against substitution and other requirements for 
backhauled donated foods. The processor may not substitute or commingle 
donated foods that are backhauled to it from a distributing or 
recipient agency's storage facility. The processor must process 
backhauled donated foods into end products for sale and delivery to the 
distributing or recipient agency that provided them and not to any 
other agency. Distributing or recipient agencies must purchase end 
products utilizing donated foods backhauled to their contracted 
processor. The processor may not provide payment for backhauled donated 
foods in lieu of processing.
    (c) Grading requirements. The processing of donated beef, pork, and 
poultry must occur under Federal acceptance service grading, which is 
conducted by the Department's Agricultural Marketing Service. Federal 
acceptance service grading ensures that processing is conducted in 
compliance with substitution and yield requirements and in conformance 
with the end product data schedule. The processor is responsible for 
paying the cost of acceptance service grading. The processor must 
maintain grading certificates and other records necessary to document 
compliance with requirements for substitution of donated foods and with 
other requirements of this subpart.
    (d) Waiver of grading requirements. The distributing agency may 
waive the grading requirement for donated beef, pork or poultry in 
accordance with one of the conditions listed in this paragraph (d). 
However, grading may only be waived on a case by case basis (e.g., for 
a particular production run); the distributing agency may not approve a 
blanket waiver of the requirement. Additionally, a waiver may only be 
granted if a processor's past performance indicates that the quality of 
the end product will not be adversely affected. The conditions for 
granting a waiver include:
    (1) That even with ample notification time, the processor cannot 
secure the services of a grader;
    (2) The cost of the grader's service in relation to the value of 
donated beef, pork or poultry being processed would be excessive; or
    (3) The distributing or recipient agency's urgent need for the 
product leaves insufficient time to secure the services of a grader.
    (e) Use of substituted donated foods. The processor may use donated 
foods that have been substituted with commercially purchased foods in 
other processing activities conducted at its facilities.


Sec.  250.35  Storage, food safety, quality control, and inventory 
management.

    (a) Storage and quality control. The processor must ensure the safe 
and effective storage of donated foods, including compliance with the 
general storage requirements in Sec.  250.12, and must maintain an 
effective quality control system at its processing facilities. The 
processor must maintain documentation to verify the effectiveness of 
its quality control system and must provide such documentation upon 
request.
    (b) Food safety requirements. The processor must ensure that all 
processing of donated foods is conducted in compliance with all 
Federal, State, and local requirements relative to food safety.
    (c) Commingling of donated foods and commercially purchased foods. 
The processor may commingle donated foods and commercially purchased 
foods, unless the processing agreement specifically stipulates that the 
donated foods must be used in processing, and not substituted, or the 
donated foods have been backhauled from a recipient agency. However, 
such commingling must be performed in a manner that ensures the safe 
and efficient use of donated foods, as well as compliance with 
substitution requirements in Sec.  250.34 and with reporting of donated 
food inventories on performance reports, as required in Sec.  250.37. 
The processor must also ensure that commingling of processed end 
products and other food products, either at its facility or at the 
facility of a commercial distributor, ensures the sale and delivery of 
end products that meet the processing requirements in this subpart--
e.g., by affixing the applicable USDA certification stamp to the 
exterior shipping containers of such end products.
    (d) Limitation on donated food inventories. Inventories of donated 
food at processors may not be in excess of a six-month supply, based on 
an average amount of donated foods utilized for that period, unless a 
higher level has been specifically approved by the distributing agency 
on the basis of a written justification submitted by the processor. 
Distributing agencies are not permitted to submit food orders 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 donated food drawdown, product promotion, 
or sales expansion. When inventories are determined to be excessive for 
a State or processor, e.g., more than six months or exceeding the 
established protection, FNS may require the transfer of inventory and/
or entitlement to another State or processor to ensure utilization 
prior to the end of the school year.
    (e) Reconciliation of excess donated food inventories. If, at the 
end of the school year, the processor has donated food inventories in 
excess of a six-month supply, the distributing agency may, in 
accordance with paragraph (d) of this section, permit the processor to 
carry over such excess inventory into the next year of its agreement, 
if it determines that the processor may efficiently store and process 
such quantity of donated foods. The distributing agency may also direct 
the processor to transfer such donated foods to other recipient 
agencies, or to transfer them to other distributing agencies, in 
accordance with Sec.  250.12(e). However, if these actions are not 
practical, the distributing agency must require the processor to pay it 
for the donated foods held in excess of allowed levels at the 
replacement value of the donated foods.
    (f) Disposition of donated food inventories upon agreement

[[Page 1250]]

termination. When an agreement terminates, and is not extended or 
renewed, the processor must take one of the actions indicated in this 
paragraph (f) with respect to remaining donated food inventories, as 
directed by the distributing agency or recipient agency, as 
appropriate. The processor must pay the cost of transporting any 
donated foods when the agreement is terminated at the processor's 
request or as a result of the processor's failure to comply with the 
requirements of this part. The processor must:
    (1) Return the donated foods, or commercially purchased foods that 
meet the substitution requirements in Sec.  250.34, to the distributing 
or recipient agency, as appropriate; or
    (2) Transfer the donated foods, or commercially purchased foods 
that meet the substitution requirements in Sec.  250.34, to another 
distributing or recipient agency with which it has a processing 
agreement; or
    (3) If returning or transferring the donated foods, or commercially 
purchased foods that meet the substitution requirements in Sec.  
250.34, is not feasible, the processor may, with FNS approval, pay the 
distributing or recipient agency, as appropriate, for the donated 
foods, at the contract value or replacement value of the donated foods, 
whichever is higher.


Sec.  250.36  End product sales and crediting for the value of donated 
foods.

    (a) Methods of end product sales. To ensure that the distributing 
or recipient agency, as appropriate, receives credit for the value of 
donated foods contained in end products, the sale of end products must 
be performed using one of the systems of end product sales described in 
this section. All systems of sales utilized must provide clear 
documentation of crediting for the value of the donated foods contained 
in the end products.
    (b) Refund or rebate. Under this system, the processor sells end 
products to the distributing or recipient agency, as appropriate, at 
the commercial, or gross, price and must provide a refund or rebate for 
the value of the donated food contained in the end products. The 
processor may also deliver end products to a commercial distributor for 
sale to distributing or recipient agencies under this system. In both 
cases, the processor must provide a refund to the appropriate agency 
within 30 days of receiving a request for a refund from that agency. 
The refund request must be in writing, which may be transmitted via 
email or other electronic submission.
    (c) Direct discount. Under this system, the processor must sell end 
products to the distributing or recipient agency, as appropriate, at a 
net price that provides a discount from the commercial case price for 
the value of donated food contained in the end products.
    (d) Indirect discount. Under this system, the processor delivers 
end products to a commercial distributor, which must sell the end 
products to an eligible distributing or recipient agency, as 
appropriate, at a net price that provides a discount from the 
commercial case price for the value of donated food contained in the 
end products. The processor must require the distributor to notify it 
of such sales, at least on a monthly basis, through automated sales 
reports or other electronic or written submission. The processor then 
compensates the distributor for the discount provided for the value of 
the donated food in its sale of end products.
    (e) Fee-for-service. Under this system, the processor must sell end 
products to the distributing or recipient agency, as appropriate, at a 
fee-for-service, which includes all costs to produce the end products 
not including the value of the donated food used in production. The 
processor must identify any charge for delivery of end products 
separately from the fee-for-service on its invoice. If the processor 
provides end products sold under fee-for-service to a distributor for 
delivery to the distributing or recipient agency, the processor must 
identify the distributor's delivery charge separately from the fee-for-
service on its invoice to the appropriate agency or may permit the 
distributor to bill the agency separately for the delivery of end 
products. When the recipient agency procures storage and distribution 
of processed end products separately from the processing of donated 
foods, the recipient agency may provide the distributor written 
approval to act as the recipient agency's authorized agent for the 
total case price (i.e., including the fee-for-service and the delivery 
charge). The processor must require that the distributor notify it of 
such sales, at least on a monthly basis, through automated sales 
reports, email, or other electronic or written submission.
    (f) Approved alternative method. The processor or distributor may 
sell end products under an alternative method approved by FNS and the 
distributing agency that ensures crediting for the value of donated 
foods contained in the end products.
    (g) Donated food value used in crediting. In crediting for the 
value of donated foods in end product sales, the contract value of the 
donated foods, as defined in Sec.  250.2, must be used.
    (h) Ensuring sale and delivery of end products to eligible 
recipient agencies. In order to ensure the sale of end products to 
eligible recipient agencies, the distributing agency must provide the 
processor with a list of recipient agencies eligible to purchase end 
products, along with the quantity of raw donated food that is to be 
delivered to the processor for processing on behalf of each recipient 
agency. In order to ensure that the distributor sells end products only 
to eligible recipient agencies, the processor must provide the 
distributor with a list of eligible recipient agencies and either:
    (1) The quantities of approved end products that each recipient 
agency is eligible to receive; or
    (2) The quantity of donated food allocated to each recipient agency 
and the raw donated food (pounds or cases) needed per case of each 
approved end product.


Sec.  250.37  Reports, records, and reviews of processor performance.

    (a) Performance reports. The processor must submit a performance 
report to the distributing agency (or to the recipient agency, in 
accordance with a Recipient Agency Processing Agreement) on a monthly 
basis, which must include the information listed in this paragraph (a). 
Performance reports must be submitted not later than 30 days after the 
end of the reporting period; however, the final (June) performance 
report must be submitted within 60 days of the end of the reporting 
period. The performance report must include the following information 
for the reporting period, with year-to-date totals:
    (1) A list of all recipient agencies purchasing end products;
    (2) The quantity of donated foods in inventory at the beginning of 
the reporting period;
    (3) The quantity of donated foods received;
    (4) The quantity of donated foods transferred to the processor from 
another entity, or transferred by the processor to another entity;
    (5) The quantity of donated foods losses;
    (6) The quantity of end products delivered to each eligible 
recipient agency;
    (7) The quantity of donated foods remaining at the end of the 
reporting period;
    (8) A certification statement that sufficient donated foods are in 
inventory or on order to account for the quantities needed for 
production of end products;

[[Page 1251]]

    (9) Grading certificates, as applicable; and
    (10) Other supporting documentation, as required by the 
distributing agency or recipient agency.
    (b) Reporting reductions in donated food inventories. The processor 
must report reductions in donated food inventories on performance 
reports only after sales of end products have been made, or after sales 
of end products through distributors have been documented. 
Documentation of distributor sales must be through the distributing or 
recipient agency's request for a refund (under a refund or rebate 
system) or through receipt of the distributor's automated sales reports 
or other electronic or written reports submitted to the processor 
(under an indirect discount system or under a fee-for-service system).
    (c) Summary performance report. Along with the submission of 
performance reports to the distributing agency, a multi-State processor 
must submit a summary performance report to FNS, on a monthly basis and 
in a format established by FNS, in accordance with its National 
Processing Agreement. The summary report must include an accounting of 
the processor's national inventory of donated foods, including the 
information listed in this paragraph (c). The report must be submitted 
not later than 30 days after the end of the reporting period; however, 
the final performance report must be submitted within 60 days of the 
end of the reporting period. The summary performance report must 
include the following information for the reporting period:
    (1) The total donated food inventory by State and the national 
total at the beginning of the reporting period;
    (2) The total quantity of donated food received by State, with 
year-to-date totals, and the national total of donated food received;
    (3) The total quantity of donated food reduced from inventory by 
State, with year-to-date totals, and the national total of donated 
foods reduced from inventory; and
    (4) The total quantity of donated foods remaining in inventory by 
State, and the national total, at the end of the reporting period.
    (d) Recordkeeping requirements for processors. The processor must 
maintain the following records relating to the processing of donated 
foods:
    (1) End product data schedules and summary end product data 
schedules, as applicable;
    (2) Receipt of donated 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 donated 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 donated 
foods, including grading certificates, as applicable;
    (8) Waivers of grading requirements, as applicable; and
    (9) Required reports.
    (e) Recordkeeping requirements for the distributing agency. The 
distributing agency must maintain the following records relating to the 
processing of donated foods:
    (1) In-State Processing Agreements and State Participation 
Agreements;
    (2) End product data schedules or summary end product data 
schedules, as applicable;
    (3) Performance reports;
    (4) Grading certificates, as applicable;
    (5) Documentation that supports information on the performance 
report, as required by the distributing agency (e.g., sales invoices or 
copies of refund payments);
    (6) Copies of audits of in-State processors and documentation of 
the correction of any deficiencies identified in such audits;
    (7) The receipt of end products, as applicable; and
    (8) Procurement documents, as applicable.
    (f) Recordkeeping requirements for the recipient agency. The 
recipient agency must maintain the following records relating to the 
processing of donated foods:
    (1) The receipt of end products purchased from processors or 
distributors;
    (2) Crediting for the value of donated foods contained in end 
products;
    (3) Recipient Agency Processing Agreements, as applicable, and, in 
accordance with such agreements, other records included in paragraph 
(e) of this section, if not retained by the distributing agency; and
    (4) Procurement documents, as applicable.
    (g) Review requirements for the distributing agency. The 
distributing agency must review performance reports and other records 
that it must maintain, in accordance with the requirements in paragraph 
(e) of this section, to ensure that the processor:
    (1) Receives donated food shipments;
    (2) Delivers end products to eligible recipient agencies, in the 
types and quantities for which they are eligible;
    (3) Meets the required processing yields for donated foods; and
    (4) Accurately reports donated food inventory activity and 
maintains inventories within approved levels.


Sec.  250.38  Provisions of agreements.

    (a) National Processing Agreement. A National Processing Agreement 
includes provisions to ensure that a multi-State processor complies 
with all of the applicable requirements in this part relating to the 
processing of donated foods.
    (b) Required provisions for State Participation Agreement. A State 
Participation Agreement with a multi-State processor must include the 
following provisions:
    (1) Contact information for all appropriate parties to the 
agreement;
    (2) The effective dates of the agreement;
    (3) A list of recipient agencies eligible to receive end products;
    (4) Summary end product data schedules, with end products that may 
be sold in the State;
    (5) Assurance that the processor will not substitute or commingle 
backhauled donated foods and will provide end products processed from 
such donated foods only to the distributing or recipient agency from 
which the foods were received;
    (6) Any applicable labeling requirements;
    (7) Other processing requirements implemented by the distributing 
agency, such as the specific method(s) of end product sales permitted;
    (8) A statement that the agreement may be terminated by either 
party upon 30 days' written notice;
    (9) A statement that the agreement may be terminated immediately if 
the processor has not complied with its terms and conditions; and
    (10) A statement requiring the processor to enter into an agreement 
with any and all distributors delivering processed end products to 
recipient agencies that ensures adequate data sharing, reporting, and 
crediting of donated foods, in accordance with Sec.  250.30(i).
    (c) Required provisions of the In-State Processing Agreement. An 
In-State Processing Agreement must include the following provisions or 
attachments:
    (1) Contact information for all appropriate parties to the 
agreement;
    (2) The effective dates of the agreement;
    (3) A list of recipient agencies eligible to receive end products, 
as applicable;

[[Page 1252]]

    (4) In the event that subcontracting is allowed, the specific 
activities that will be performed under subcontracts;
    (5) Assurance that the processor will provide a performance bond or 
irrevocable letter of credit to protect the value of donated foods it 
is expected to maintain in inventory, in accordance with Sec.  250.32;
    (6) End product data schedules for all end products, with all 
required information, in accordance with Sec.  250.33(a);
    (7) Assurance that the processor will meet processing yields for 
donated foods, in accordance with Sec.  250.33;
    (8) Assurance that the processor will compensate the distributing 
or recipient agency, as appropriate, for any loss of donated foods, in 
accordance with Sec.  250.33(c);
    (9) Any applicable labeling requirements;
    (10) Assurance that the processor will meet requirements for the 
substitution of commercially purchased foods for donated foods, 
including grading requirements, in accordance with Sec.  250.34;
    (11) Assurance that the processor will not substitute or commingle 
backhauled donated foods and will provide end products processed from 
such donated foods only to the recipient agency from which the foods 
were received, as applicable;
    (12) Assurance that the processor will provide for the safe and 
effective storage of donated foods, meet inspection requirements, and 
maintain an effective quality control system at its processing 
facilities;
    (13) Assurance that the processor will report donated food 
inventory activity and maintain inventories within approved levels;
    (14) Assurance that the processor will return, transfer, or pay 
for, donated food inventories remaining upon termination of the 
agreement, in accordance with Sec.  250.35(f);
    (15) The specific method(s) of end product sales permitted, in 
accordance with Sec.  250.36;
    (16) Assurance that the processor will credit recipient agencies 
for the value of all donated foods, in accordance with Sec.  250.36;
    (17) Assurance that the processor will submit performance reports 
and meet other reporting and recordkeeping requirements, in accordance 
with Sec.  250.37;
    (18) Assurance that the processor will obtain independent CPA 
audits and will correct any deficiencies identified in such audits, in 
accordance with Sec.  250.20;
    (19) A statement that the distributing agency, subdistributing 
agency, or recipient agency, the Comptroller General, the Department of 
Agriculture, or their duly authorized representatives, may perform on-
site reviews of the processor's operation to ensure that all activities 
relating to donated foods are performed in accordance with the 
requirements in 7 CFR part 250;
    (20) A statement that the agreement may be terminated by either 
party upon 30 days' written notice;
    (21) A statement that the agreement may be terminated immediately 
if the processor has not complied with its terms and conditions;
    (22) A statement that extensions or renewals of the agreement, if 
applicable, are contingent upon the fulfillment of all agreement 
provisions; and
    (23) A statement requiring the processor to enter into an agreement 
with any and all distributors delivering processed end products to 
recipient agencies that ensures adequate data sharing, reporting, and 
crediting of donated foods, in accordance with Sec.  250.30(i).
    (d) Required provisions for Recipient Agency Processing Agreement. 
The Recipient Agency Processing Agreement must contain the same 
provisions as an In-State Processing Agreement, to the extent that the 
distributing agency permits the recipient agency to perform activities 
normally performed by the distributing agency under an In-State 
Processing Agreement (e.g., approval of end product data schedules, 
review of performance reports, or management of the performance bond). 
However, a list of recipient agencies eligible to receive end products 
need not be included.
    (e) Noncompliance with processing requirements. If the processor 
has not complied with processing requirements, the distributing or 
recipient agency, as appropriate, must not extend or renew the 
agreement and may immediately terminate it.


Sec.  250.39  Miscellaneous provisions.

    (a) Waiver of processing requirements. 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 processing of donated foods.
    (b) Processing activity guidance. Distributing agencies must 
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 must 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 must include, at a minimum, statements of the 
distributing agency's policies and procedures regarding:
    (1) Contract approval;
    (2) Monitoring and review of processing activities;
    (3) Recordkeeping and reporting requirements;
    (4) Inventory controls; and
    (5) Refund applications.
    (c) Guidance or information. Guidance or information relating to 
the processing of donated foods is included on the FNS Web site or may 
otherwise be obtained from FNS.

    Dated: December 23, 2016.
Richard Lucas,
Acting Administrator, Food and Nutrition Service.
[FR Doc. 2016-31561 Filed 1-4-17; 8:45 am]
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                                                                                                                                                                                                      1231

                                                    Proposed Rules                                                                                                 Federal Register
                                                                                                                                                                   Vol. 82, No. 3

                                                                                                                                                                   Thursday, January 5, 2017



                                                    This section of the FEDERAL REGISTER                      Mail: Send comments to Kiley Larson,                 Service (FNS) has taken a number of
                                                    contains notices to the public of the proposed          Program Analyst, Policy Branch, Food                   steps to facilitate the use of donated
                                                    issuance of rules and regulations. The                  Distribution Division, Food and                        foods by commercial processors in the
                                                    purpose of these notices is to give interested          Nutrition Service, U.S. Department of                  interest of providing more efficient and
                                                    persons an opportunity to participate in the            Agriculture, Room 500, 3101 Park                       effective service to school food
                                                    rule making prior to the adoption of the final
                                                    rules.
                                                                                                            Center Drive, Alexandria, Virginia                     authorities and other recipient agencies.
                                                                                                            22302–1594.                                            Most of these changes have been
                                                                                                              Hand Delivery or Courier: Deliver                    implemented as a result of discussions
                                                    DEPARTMENT OF AGRICULTURE                               comments to the above address.                         with State and local program operators,
                                                                                                            FOR FURTHER INFORMATION CONTACT:                       processors and industry consultants.
                                                    Food and Nutrition Service                              Kiley Larson or Erica Antonson at the                     FNS has used its regulatory waiver
                                                                                                            above address or telephone (703) 305–                  authority in current 7 CFR 250.30(q) to
                                                    7 CFR Part 250                                          2680.                                                  initiate demonstration projects designed
                                                                                                            SUPPLEMENTARY INFORMATION:                             to better serve recipient agencies and
                                                    RIN 0584–AE38                                                                                                  foster a more efficient program. These
                                                                                                            I. Background                                          demonstration projects have proven
                                                    Revisions and Clarifications in                            The Department of Agriculture (the                  very informative as the industry and the
                                                    Requirements for the Processing of                      Department or USDA) provides donated                   needs of recipient agencies have
                                                    Donated Foods                                           foods to State distributing agencies for               evolved. Many of these methods tested,
                                                                                                            distribution to recipient agencies (e.g.,              such as the expansion of permitted
                                                    AGENCY:  Food and Nutrition Service                     school food authorities) participating in              substitutions and the implementation of
                                                    (FNS), USDA.                                            the National School Lunch Program                      National Processing Agreements, have
                                                    ACTION: Proposed rule.                                  (NSLP) and other child nutrition or food               proven successful and are proposed for
                                                                                                            distribution programs. In accordance                   codification in this rule.
                                                    SUMMARY:   This rule proposes to revise                                                                           In a final rule published in the
                                                                                                            with Federal regulations in 7 CFR part
                                                    and clarify requirements for the                                                                               Federal Register on October 23, 2002 at
                                                                                                            250, distributing agencies may provide
                                                    processing of donated foods in order to:                                                                       67 FR 65011, 7 CFR part 250 was
                                                                                                            the donated foods to commercial
                                                    Incorporate successful processing                                                                              amended to expand the types of donated
                                                                                                            processors for processing into end
                                                    options tested in demonstration                                                                                foods that processors were permitted to
                                                                                                            products for use in NSLP or other food
                                                    projects, ensure accountability for                                                                            substitute with commercially purchased
                                                                                                            programs. For example, a whole chicken
                                                    donated foods provided for processing,                                                                         foods without prior FNS approval. The
                                                                                                            or chicken parts may be processed into
                                                    and increase program efficiency. The                                                                           rule permitted processors to substitute
                                                                                                            precooked grilled chicken strips for use
                                                    rule would require multi-State                                                                                 donated fruits, vegetables, and eggs with
                                                                                                            in NSLP. The ability to divert donated
                                                    processors to enter into National                                                                              commercially purchased foods of the
                                                                                                            foods for processing provides recipient
                                                    Processing Agreements to process                                                                               same generic identity, of U.S. origin,
                                                                                                            agencies with more options for using
                                                    donated foods into end products, permit                                                                        and of equal or better quality than the
                                                                                                            donated foods in their programs. The
                                                    processors to substitute commercially                                                                          donated foods. Additionally, limited
                                                                                                            regulations ensure that State and
                                                    purchased beef and pork of U.S. origin                                                                         substitution of donated poultry was
                                                                                                            recipient agencies, and program
                                                    and of equal or better quality for                                                                             permitted, in accordance with the
                                                                                                            recipients, receive the full benefit of the
                                                    donated beef and pork, and would                                                                               processor’s USDA-approved
                                                                                                            donated foods provided to such
                                                    increase oversight of inventories of                                                                           substitution plan. Substitution allows
                                                                                                            processors for processing into end
                                                    donated foods at processors. The rule                                                                          processors more flexibility and
                                                                                                            products. Distributing agencies must
                                                    also revises regulatory provisions in                                                                          efficiency in producing finished end
                                                                                                            enter into agreements with processors to
                                                    plain language, to make them easier to                                                                         products for school food authorities
                                                                                                            ensure compliance with the
                                                    read and understand.                                                                                           which helps minimize cost while
                                                                                                            requirements in Federal regulations.
                                                    DATES: To be assured of consideration,                     Over the last 30 years, the quantity                ensuring quality.
                                                    comments must be received on or before                  and variety of donated foods provided                     In May 2013, FNS initiated a
                                                    March 6, 2017.                                          in the NSLP and other child nutrition                  demonstration project which permitted
                                                    ADDRESSES: The Food and Nutrition                       programs has increased substantially.                  processors with a USDA-approved
                                                    Service invites interested persons to                   Donated foods meet the highest quality                 substitution plan to substitute
                                                    submit comments on this proposed rule.                  and safety standards and are selected by               commercially purchased beef and pork
                                                    You may submit comments, identified                     the Department to assist recipient                     for donated beef and pork, in
                                                    by RIN number 0584–AE38, by any of                      agencies in offering nutritious and well-              accordance with the processor’s USDA-
                                                    the following methods:                                  balanced meals that meet meal pattern                  approved substitution plan. In
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                                                      Federal eRulemaking Portal: Go to                     and nutrition standards for meals served               accordance with the terms of the
                                                    http://www.regulations.gov. Follow the                  in child nutrition programs.                           demonstration project, as established in
                                                    online instructions for submitting                      Concurrently, the variety of end                       FNS policy memorandum FD–130:
                                                    comments.                                               products offered by processors has                     Processing—Substitution of USDA Beef
                                                      Email: Send comments to                               increased and adapted to reflect the                   and Pork, the commercial product must
                                                    ProcessingRuleComments@fns.usda.gov.                    types of foods recipient agencies need.                be of U.S. origin and of equal or better
                                                    Include RIN number 0584–AE38 in the                     In the last several years, the                         quality in all Departmental purchase
                                                    subject line of the message.                            Department’s Food and Nutrition                        specifications than the donated food.


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                                                    1232                    Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules

                                                    Among other requirements of the                            On August 24, 2006, FNS published a                 specifying the (a) distributor’s financial
                                                    demonstration project, the substitution                 proposed a rule to revise and clarify                  liability for the replacement value of
                                                    plan has required assurances that: (1)                  requirements for the processing of                     donated foods once delivered to the
                                                    Processing is performed in plants under                 donated foods (71 FR 50249). As part of                distributor; (b) frequency of reporting;
                                                    continuous Federal or State meat                        this proposed rule, FNS proposed to                    and (c) applicable value pass through
                                                    inspection; (2) the Department’s                        retain title to donated foods delivered to             system; and
                                                    Agricultural Marketing Service (AMS)                    multi-State processors until acceptance                   (7) Require distributing agencies to
                                                    graders monitor the process to ensure                   of finished end products by the State                  more closely monitor donated food
                                                    compliance with substitution                            distributing or recipient agency. It was               inventories at processors to ensure that
                                                    requirements; (3) commercial product is                 subsequently determined that FNS                       processors do not maintain inventories
                                                    purchased from an AMS-approved                          needed additional statutory authority to               in excess of what can be effectively
                                                    vendor in good standing and is tested to                retain title to donated foods at the                   utilized by recipient agencies in a
                                                    ensure that it is of equal or better quality            processor and the rule was not finalized               timely manner.
                                                    in all Departmental purchase                            pending legislative change. Section                       As discussed below, we propose to
                                                    specifications, including specifications                4104 of the Agricultural Act of 2014                   amend current §§ 250.2, 250.11, 250.18
                                                    relating to acceptable tolerance levels                 (Pub. L. 113–79, the Farm Bill) amended                and 250.19, and to completely revise
                                                    for specific microorganisms, chemical                   Section 17 of the Commodity                            § 250.30 under Subpart C, Processing
                                                    residues, and fat; and (4) commercial                   Distribution Reform Act and WIC                        and Labeling of Donated Foods. The
                                                    product is subject to audited processes                 Amendments of 1987, 7 U.S.C. 612c                      revision of Subpart C would break out
                                                    for humane handling, food defense, and                  note to provide that authority and the                 the single section in that subpart into 10
                                                    threat agent testing.                                   necessary statutory authority for FNS to               new sections to more clearly present the
                                                       In October 2004, FNS initiated a                     promulgate regulations ensuring                        specific processing requirements. Lastly,
                                                    demonstration project to allow multi-                   accountability of USDA Donated Foods.                  we propose to rewrite all revised
                                                    State processors to submit end product                     The regulatory amendments proposed                  sections in plain language, to make
                                                    data schedules to FNS for review and                    in this rule would implement provisions                them easier to read and understand but
                                                    approval at the national level, rather                  of the Farm Bill related to processing of              not to change or alter the interpretation
                                                    than submitting them to State                           donated foods and incorporate into 7                   and application of the revised sections.
                                                    distributing agencies for their approval.               CFR part 250 the processing options                    The proposed changes to 7 CFR part 250
                                                    End product data schedules indicate the                 provided under the demonstration                       are discussed in detail below.
                                                    required yield of donated foods that                    project described above. They would
                                                                                                            also more effectively ensure                           II. Discussion of the Rule’s Provisions
                                                    must be obtained in their processing
                                                    into end products. Review and approval                  accountability for donated foods                       A. Definitions, § 250.2
                                                    of end product data schedules, however,                 provided for processing while
                                                                                                            streamlining requirements to increase                     Due to developments in food
                                                    is a time and labor-intensive activity for                                                                     distribution programs, and for the
                                                    State distributing agencies. National                   program efficiency for recipient
                                                                                                            agencies. Most significantly, the rule                 purpose of clarification, we propose to
                                                    approval of end product data schedules                                                                         remove, revise, and add definitions in
                                                    under the demonstration project has                     proposes to:
                                                                                                               (1) Require that FNS retain title of                current § 250.2 relating to processing of
                                                    reduced the time and labor burden                                                                              donated foods. We propose to remove
                                                                                                            USDA Donated Foods while at multi-
                                                    considerably for both distributing                                                                             the definitions of ‘‘Contracting agency’’
                                                                                                            State processors;
                                                    agencies and all multi-State processors                    (2) Require each multi-State processor              and ‘‘Fee-for-service.’’ The term
                                                    since processors are not required to                    to sign a National Processing Agreement                ‘‘Contracting agency’’ would be replaced
                                                    submit end product data schedules for                   with FNS and to submit end product                     throughout the proposed regulatory
                                                    approval in each State in which they                    data schedules to the Department for                   provisions with the specific agency (i.e.,
                                                    operate.                                                approval at the national level;                        distributing and/or recipient agency)
                                                       In conjunction with the                                 (3) Require multi-State processors to               that may enter into a processing
                                                    demonstration project allowing national                 submit a performance bond or letter of                 agreement. The meaning of the term
                                                    approval of end product data schedules,                 credit to FNS to protect the value of the              ‘‘Fee-for-service’’ is clear in the context
                                                    FNS requires multi-State processors to                  processors’ donated food inventories;                  of the proposed regulatory provisions
                                                    sign a National Processing Agreement.                      (4) Permit substitution of donated beef             and no longer requires a separate
                                                    Under the National Processing                           and pork with commercial beef and                      definition.
                                                    Agreement, FNS monitors the                             pork of U.S. origin and of equal or better                We propose to add definitions of
                                                    processor’s national inventory of                       quality in all Departmental purchase                   ‘‘Backhauling,’’ ‘‘Commingling,’’ ‘‘End
                                                    donated foods, and holds and manages                    specifications than the donated food,                  product data schedule,’’ ‘‘In-State
                                                    the processor’s performance bond or                     provided applicable requirements are                   Processing Agreement,’’ ‘‘National
                                                    letter of credit, which protects the value              met, including a USDA-approved                         Processing Agreement,’’ ‘‘Recipient
                                                    of the processor’s donated food                         substitution plan;                                     Agency Processing Agreement,’’
                                                    inventories. Under the demonstration                       (5) Establish a title transfer exception            ‘‘Replacement value,’’ and ‘‘State
                                                    project, the monitoring and protection                  dictating that when a recipient agency                 Participation Agreement.’’ The
                                                    of donated food inventories held by                     has contracted with a distributor to act               definition of ‘‘Backhauling’’ would
                                                    processors at the national level has                    as an authorized agent, title to finished              describe a means of delivery of donated
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                                                    further reduced the burden on                           end products containing donated foods                  food to a processor from a recipient
                                                    distributing agencies. Distributing                     transfers to the recipient agency upon                 agency’s storage facility. The definition
                                                    agencies may include other State-                       delivery and acceptance by the                         of ‘‘Commingling’’ would describe the
                                                    specific processing requirements and                    contracted distributor;                                common storage of donated foods with
                                                    select the processor’s nationally                          (6) Require processors providing end                commercially purchased foods. The
                                                    approved end products for sale in the                   products containing donated foods to a                 definition of ‘‘End product data
                                                    State under their State Participation                   distributor to enter into a written                    schedule’’ would convey the important
                                                    Agreements with multi-State processors.                 agreement with the distributor                         function of this document in describing


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                                                                            Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules                                              1233

                                                    the processing of donated foods into                    processor, FNS would not have the                      arise that may impede the transfer of
                                                    finished end products. Definitions of                   authority to call in the bond if the                   title described above. Some processors
                                                    ‘‘National Processing Agreement,’’                      processor failed to comply with                        and distributors, working in this
                                                    ‘‘Recipient Agency Processing                           processing requirements. Hence, we                     manner, manufacture and/or order some
                                                    Agreement,’’ ‘‘State Participation                      propose in § 250.11(e) to state that title             processed end products prior to
                                                    Agreement,’’ and ‘‘In-State Processing                  to donated foods provided to a multi-                  receiving donated food orders from
                                                    Agreement’’ would help the reader                       State processor, in accordance with its                recipient agencies. This results in
                                                    understand the different types of                       National Processing Agreement,                         processors and distributors ‘‘pooling’’
                                                    processing agreements permitted. These                  transfers to the distributing or recipient             their inventories of processed end
                                                    processing agreements are further                       agency, as appropriate, upon the                       products, particularly for products
                                                    described in the proposed § 250.30. The                 acceptance of finished end products at                 containing nonsubstitutable items. In
                                                    definition of ‘‘Replacement value’’                     the time and place of delivery.                        other words, processors will
                                                    would clarify the donated food value                       Many recipient agencies receiving                   manufacture finished end products and
                                                    that must be used by processors to                      finished end products from multi-State
                                                                                                                                                                   distributors will order and receive
                                                    ensure compensation for donated foods                   processors contract with a distributor to
                                                                                                                                                                   processed end products from the
                                                    lost in processing or other activities.                 store end products and/or transport the
                                                                                                                                                                   processor without either entity knowing
                                                    The definition of ‘‘Replacement value’’                 finished end products to their facilities.
                                                                                                            The inclusion of distributors in the                   specifically which recipient agency will
                                                    reflects the price in the market at the
                                                                                                            supply chain for finished end products                 order or receive those items. This is
                                                    time that the Department assigns the
                                                                                                            creates challenges related to tracking                 most commonly due to processors and/
                                                    value whereas the definition of
                                                    ‘‘Contract value’’ in current regulations               and reporting the value of donated                     or distributors manufacturing/ordering
                                                    reflects the Department’s current                       foods. Because processors are not a                    end products in advance of receiving
                                                    acquisition price, which is set annually.               party to the contractual relationship                  orders from recipient agencies based on
                                                                                                            between recipient agencies and                         forecasted estimates. The diagram below
                                                    B. Delivery and Receipt of Donated Food                 distributors, processors lose control of               illustrates the differences between
                                                    Shipments, § 250.11                                     finished end products once they are                    ‘‘pooled’’ and ‘‘non-pooled’’ inventory
                                                       We propose to amend current                          delivered to the distributors designated               in these specific cases (i.e.,
                                                    § 250.11(e), which describes the timing                 by each recipient agency. Therefore, we                nonsubstitutable donated food traveling
                                                    of transfer of title to donated foods and               propose in this rulemaking that when a                 through a supply chain that includes a
                                                    the agency to which title is transferred.               distributor is contracted by the recipient             distributor acting as the recipient
                                                    Currently, title to donated foods                       agency for the transportation and/or                   agency’s authorized agent).
                                                    transfers to the distributing or recipient              storage of finished end products and is                   In the case of ‘‘pooled’’ inventories (as
                                                    agency upon its acceptance of the                       acting as the recipient agency’s                       illustrated below), under current
                                                    donated foods at the time and place of                  authorized agent (i.e., purchasing                     regulations title cannot transfer to the
                                                    delivery. However, we also propose to                   processed end products containing                      recipient agency at the time of delivery
                                                    add an exception to the timing of title                 donated foods on behalf of the recipient               at their contracted distributor because
                                                    transfer, in accordance with the                        agency), title of donated foods would                  neither the processor nor the distributor
                                                    amendments made by Section 4104 of                      transfer to the recipient agency upon the              know which recipient agency will
                                                    the Farm Bill and the requirements                      acceptance of finished end products at                 receive which products. The intent of
                                                    under National Processing Agreements                    the time and place of delivery at the
                                                    proposed in this rule. In the proposed                                                                         the proposed § 250.11(e) is to discourage
                                                                                                            recipient agency or the distributor
                                                    § 250.32(a), we are proposing to require                                                                       the pooling of processed end products
                                                                                                            acting as the authorized agent of the
                                                    a multi-State processor to provide a                                                                           containing nonsubstitutable donated
                                                                                                            recipient agency, whichever happens
                                                    performance bond or letter of credit to                                                                        foods (i.e., end products must be
                                                                                                            first.
                                                    FNS to protect the value of the                            Currently, in situations where                      assigned to a specific recipient agency
                                                    processor’s donated food inventory in                   recipient agencies contract with a                     by the time they are accepted at a
                                                    accordance with its National Processing                 distributor to store and/or transport                  distributor so that the title may be
                                                    Agreement. However, unless the                          processed end products containing                      transferred to the correct recipient
                                                    Department retains title to the donated                 donated foods and act as their                         agency).
                                                    foods held in the inventory of a                        authorized agent, complications can                       Current Practice:
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                                                      This shift in the timing of title transfer            processors, it would also place more                   reports and other supporting
                                                    would impact the calculation of                         responsibility on recipient agencies to                documentation, as required by the
                                                    performance bonds currently being                       track and protect the value of donated                 distributing agency or by FNS, in
                                                    required of multi-State processors                      food inventories being managed by their                accordance with proposed § 250.37.
                                                    through National Processing                             designated distributors, acting as their
                                                                                                                                                                   D. Recordkeeping Requirements,
                                                    Agreements. All other factors held                      agents.
                                                                                                                                                                   § 250.19
                                                    equal, some multi-State processors
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                                                                                                            C. Reporting Requirements, § 250.18
                                                    would encounter a reduction in the                                                                                In current § 250.19(a), processors
                                                    required annual bond amount, as                           In current § 250.18(b), processors are               must maintain records documenting the
                                                    determined by FNS, due to the transfer                  required to submit monthly                             sale of end products to recipient
                                                    of title of donated foods to the recipient              performance reports to the distributing                agencies, including the sale of such end
                                                    agency taking place at an earlier stage in              agency, in accordance with current                     products by distributors. As discussed
                                                    the supply chain. Although this shift                   § 250.30(m). We propose to retain this                 later in the preamble, we are proposing
                                                    would reduce inventories and bonding                    requirement but to clarify that                        to include specific recordkeeping
                                                    amounts for some multi-State                            processors must submit performance                     requirements for processors in the
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                                                                            Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules                                              1235

                                                    proposed § 250.37(d). Hence, we                         donated foods, or to use donated foods                 processor’s national donated food
                                                    propose to amend this section to require                in the preparation of meals, is also                   inventory through the review of
                                                    that processors must comply with the                    considered processing in 7 CFR part                    performance reports, which processors
                                                    applicable recordkeeping requirements                   250.                                                   must submit to FNS on a monthly basis.
                                                    in Subpart C of this part and with any                     In current § 250.30(b), a distributing              Hence, in the proposed § 250.30(c), we
                                                    other recordkeeping requirements                        agency may contract with a processor to                would require that a multi-State
                                                    included in their agreements.                           process donated foods, or may permit                   processor enter into a National
                                                                                                            subdistributing or recipient agencies to               Processing Agreement with FNS to
                                                    E. Subpart C—Processing of Donated                      contract with processors. Currently,                   process donated foods into end
                                                    Foods                                                   most donated foods are processed in                    products, in accordance with end
                                                      As previously mentioned, we propose                   accordance with National Processing                    product data schedules approved by
                                                    to completely revise current Subpart C,                 Agreements or In-State Processing                      FNS. We would also indicate that, in the
                                                    Processing and Labeling of Donated                      Agreements. However, some large                        proposed § 250.32, FNS holds and
                                                    Foods, which currently contains only                    school food authorities currently have                 manages the multi-State processor’s
                                                    § 250.30. In revising Subpart C, we                     agreements with processors to process                  performance bond or letter of credit to
                                                    would restructure it into 10 new                        donated foods and contracts to purchase                protect the value of donated food
                                                    sections, to more clearly present the                   the finished end products, as permitted                inventories under the National
                                                    specific processing requirements, and                   by distributing agencies. Additionally,                Processing Agreement. We would
                                                    rewrite these sections in plain language.               as previously described, FNS has                       indicate that FNS does not itself procure
                                                    We propose to include the requirements                  permitted multi-State processors to                    or purchase end products under such
                                                    for specific processing activities in the               process donated foods in accordance                    agreements, and that a multi-State
                                                    order in which they most commonly                       with National Processing Agreements                    processor must enter into a State
                                                    occur; i.e., entering into processing                   under a demonstration project initiated                Participation Agreement with the
                                                    agreements, processing of donated foods                 in 2004.                                               distributing agency in order to sell
                                                    into end products, sale of end products,                   In the proposed § 250.30(b), we                     nationally approved end products in the
                                                    submission of reports, etc. We also                     propose to clarify that processing of                  State, as in the proposed § 250.30(d).
                                                    propose to change the heading of                        donated foods must be performed in                        In the proposed § 250.30(d), we would
                                                    Subpart C to Processing of Donated                      accordance with an agreement between                   require the distributing agency to enter
                                                    Foods. The new sections proposed                        the processor and FNS, between the                     into a State Participation Agreement
                                                    under the revised Subpart C include the                 processor and the distributing agency,                 with a multi-State processor to permit
                                                    following:                                              or, if permitted by the distributing                   the sale of end products produced under
                                                                                                            agency, between the processor and a                    the processor’s National Processing
                                                    250.30 Processing of donated foods into end
                                                      products.
                                                                                                            recipient agency (or subdistributing                   Agreement in the State, as previously
                                                    250.31 Procurement requirements.                        agency). We propose to include in                      indicated. The State Participation
                                                    250.32 Protection of donated food value.                proposed § 250.30(b) the stipulation in                Agreement is currently utilized in
                                                    250.33 Ensuring processing yields of                    current § 250.30(c)(5)(ix) that an                     conjunction with National Processing
                                                      donated foods.                                        agreement may not obligate the                         Agreements in the demonstration
                                                    250.34 Substitution of donated foods.                   distributing or recipient agency, or the               project. Under the State Participation
                                                    250.35 Storage, food safety, quality control,           Department, to provide donated foods to                Agreement, we propose to permit the
                                                      and inventory management.                             a processor for processing. USDA                       distributing agency to select the
                                                    250.36 End product sales and crediting for
                                                                                                            purchase and donation of foods is                      processor’s nationally approved end
                                                      the value of donated foods.
                                                    250.37 Reports, records, and reviews of                 dependent on market conditions, and                    products for sale to eligible recipient
                                                      processor performance.                                specific foods may not be available for                agencies within the State or to directly
                                                    250.38 Provisions of agreements.                        donation in certain years. We propose to               purchase such end products. The
                                                    250.39 Miscellaneous provisions.                        clarify that the agreements described in               processor may provide a list of such
                                                                                                            this section are required in addition to,              nationally approved end products in a
                                                    1. Processing of Donated Foods Into End                 not in lieu of, competitively procured                 summary end product data schedule.
                                                    Products, § 250.30                                      contracts required in accordance with                  We also propose to permit the
                                                       In the proposed § 250.30, we propose                 § 250.31. We propose to revise the                     distributing agency to include other
                                                    to state clearly why donated foods are                  requirement in current § 250.30(c)(4)                  processing requirements in the State
                                                    provided to processors for processing,                  that indicates which official of the                   Participation Agreement, such as the
                                                    and to describe the different types of                  processor must sign the processing                     specific methods of end product sales
                                                    processing agreements permitted,                        agreement and more simply state in                     permitted in the State, in accordance
                                                    including National, In-State, and                       proposed § 250.30(b) that the processing               with the proposed § 250.36, (e.g., a
                                                    Recipient Agency Processing                             agreement must be signed by an                         refund, discount, or indirect discount
                                                    Agreements. However, we propose to                      authorized individual acting for the                   method of sales), or the use of labels
                                                    include the specific provisions required                processor. We propose to remove the                    attesting to fulfillment of meal pattern
                                                    for each type of agreement in the                       stipulation in current § 250.30(c)(1) that             requirements in child nutrition
                                                    proposed § 250.38, as the reason for                    a processing agreement must be in                      programs. We propose to require the
                                                    their inclusion would only be clear with                standard written form.                                 distributing agency to utilize selection
                                                    an understanding of the processing                         In accordance with the National                     criteria in current § 250.30(c)(1) to select
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                                                    requirements contained in the preceding                 Processing Agreement permitted under                   processors with which to enter into
                                                    sections.                                               the demonstration project, FNS reviews                 State Participation Agreements.
                                                       In the proposed § 250.30(a), we                      and approves end product data                             Currently, a distributing agency must
                                                    propose to describe the benefit of                      schedules submitted by multi-State                     enter into an In-State Processing
                                                    providing donated foods to a processor                  processors, and holds and manages the                  Agreement with an in-State processor
                                                    for processing into end products, and to                processor’s performance bond or letter                 (i.e., a processor which only services
                                                    clarify that a processor’s use of a                     of credit to protect the value of donated              recipient agencies in a single State via
                                                    commercial facility to repackage                        food inventories. FNS also monitors the                a production facility located in the same


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                                                    1236                    Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules

                                                    State) to process donated foods into                    an agreement between the parties (such                    In the proposed § 250.30(i), we would
                                                    finished end products for sale in the                   as in a school cooperative). We propose                require agreements between processors
                                                    State. Under such an agreement, the                     to require the recipient agency to utilize             and distributors. This proposal would
                                                    distributing agency may procure the                     selection criteria in current                          provide distributing and recipient
                                                    services and purchase the finished end                  § 250.30(c)(1) to select processors with               agencies with another tool to ensure that
                                                    products for distribution to eligible                   which to enter into Recipient Agency                   the value of donated foods and finished
                                                    recipient agencies. However, it may also                Processing Agreements. We propose to                   end products are properly credited and
                                                    select a number of processors with                      include the requirement in current                     provided to recipient agencies when
                                                    which it enters into such agreements                    § 250.30(l) that the distributing agency               third party distributors exist in the
                                                    and permit recipient agencies to                        approve all Recipient Agency                           supply chain between processors and
                                                    purchase finished end products from                     Processing Agreements. In general, FNS                 recipient agencies. The agreement,
                                                    them, in accordance with applicable                     recommends that distributing agencies                  initiated by the processor before
                                                    procurement requirements. These latter                  consult with the State administering                   releasing finished end products to a
                                                    types of processing agreements are                      agency for the review and approval of                  distributor, must reference, at a
                                                    commonly called ‘‘master agreements.’’                  these agreements, if necessary. State                  minimum, the financial liability (i.e.,
                                                    The distributing agency must utilize                    administering agencies have experience                 who must pay) for the replacement
                                                    selection criteria in current                           reviewing and establishing processes to                value of donated foods, not less than
                                                    § 250.30(c)(1) to select processors with                review contracts which are similar to                  monthly end product sales reporting
                                                    which to enter into master agreements.                  Recipient Agency Processing                            frequency, requirements under § 250.11,
                                                    Under all In-State Processing                           Agreements.                                            and the applicable value pass through
                                                    Agreements, the distributing agency                       In current § 250.30(b)(1), the                       system to ensure that the value of
                                                    must approve end product data                           distributing agency must test end                      donated foods and finished end
                                                    schedules submitted by the processor,                   products with recipient agencies prior                 products are properly credited to
                                                    hold and manage the processor’s                         to entering into processing agreements,                recipient agencies. Distributing agencies
                                                    performance bond or letter of credit, and               to ensure that they will be acceptable to              could set additional requirements such
                                                    assure compliance with all processing                   recipient agencies. Such testing is not                as requiring that copies or templates of
                                                    requirements.                                           required if end products have                          these agreements be included with the
                                                       In the proposed § 250.30(e), we                      previously been tested, or have                        submission of signed State Participation
                                                    propose to clarify the distinction                      otherwise been determined to be                        Agreements.
                                                    between master agreements and other                     acceptable to recipient agencies. We                      In current § 250.30(c)(1), processing
                                                    In-State Processing Agreements and to                   propose to include these requirements                  agreements are limited to one year, but
                                                    include in this proposed section the                    in the proposed § 250.30(g), but to                    may provide for an option to extend the
                                                    required criteria in current                            clarify that the requirements only apply               agreement for two additional one-year
                                                    § 250.30(c)(2) for selecting processors                 to distributing agencies that procure end              periods. In the proposed § 250.30(j), we
                                                    under master agreements. We propose to                  products on behalf of recipient agencies               propose to revise this requirement by
                                                    require that the distributing agency                    or otherwise limit recipient agencies’                 permitting all agreements between a
                                                    enter into an In-State Processing                       access to the procurement of specific                  distributing, subdistributing, or
                                                    Agreement with an in-State processor to                 end products. We also propose to clarify               recipient agency and a processor to be
                                                    process donated foods, as currently                     that the distributing agency may permit                up to five years in duration. This
                                                    required under the demonstration                        recipient agencies to test end products.               proposal would permit the appropriate
                                                    project.                                                We also propose to amend the current                   agency to determine the length of
                                                       In current § 250.30(b)(3), the                       requirement that the distributing agency               agreement that would be to its best
                                                    distributing agency may permit                          develop a system to monitor product                    advantage, within the five-year
                                                    recipient agencies (or subdistributing                  acceptability on a periodic basis by                   limitation, and would reduce the time
                                                    agencies) to enter into agreements with                 requiring instead that the distributing                and labor burden imposed on such
                                                    processors to process donated foods and                 agency, or its recipient agencies, must                agencies. We propose to make National
                                                    to purchase the finished end products.                  monitor product acceptability on an                    Processing Agreements permanent. We
                                                    We propose to permit such agreements                    ongoing basis.                                         propose to indicate that amendments to
                                                    in the proposed § 250.30(f), and to refer                 In current § 250.30(c)(5)(xv), a                     any agreements may be made as needed
                                                    to them as Recipient Agency Processing                  processor may not assign the processing                (e.g., when new subcontractors are
                                                    Agreements. We also propose to clarify                  agreement, or subcontract with another                 added), with the concurrence of the
                                                    that, under such agreements, the                        entity, to perform any aspect of                       parties to the agreement, and that such
                                                    distributing agency may also delegate                   processing without the written consent                 amendments would be effective for the
                                                    oversight and monitoring to the                         of the distributing agency. We propose                 duration of the agreement, unless
                                                    recipient agency to approve end product                 to clarify, in the proposed § 250.30(h),               otherwise indicated.
                                                    data schedules or select nationally                     that a processor may not assign any                       We propose to remove the following
                                                    approved end product data schedules,                    processing activities under its                        requirements or statements in current
                                                    review processor performance reports,                   processing agreement, or subcontract                   § 250.30 related to processing
                                                    manage the performance bond or letter                   with another entity to perform any                     agreements, as they are overly restrictive
                                                    of credit of an in-State processor, and                 aspect of processing, without the                      or unnecessary given current practice
                                                    monitor other processing activities. All                written consent of the other party to the              and administrative structure:
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                                                    such activities must be performed in                    agreement, which may be the                               • The requirement in current
                                                    accordance with the requirements of                     distributing, subdistributing, or                      § 250.30(c)(1) that the FNS Regional
                                                    this part. We propose to clarify that a                 recipient agency, or FNS. We propose to                Office review processing agreements.
                                                    recipient agency may also enter into a                  permit the distributing agency to                         • The requirement in current
                                                    Recipient Agency Processing                             provide the required written consent as                § 250.30(c)(3) that the agreement be
                                                    Agreement, and perform the activities                   part of its State Participation Agreement              prepared and reviewed by State legal
                                                    described above, on behalf of other                     or In-State Processing Agreement with                  staff to ensure conformance with
                                                    recipient agencies, in accordance with                  the processor.                                         Federal regulations.


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                                                                            Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules                                            1237

                                                      • The requirement in current                          for processing, by means of a                            In the proposed § 250.33, we propose
                                                    § 250.30(l) that the distributing agency                performance bond, an irrevocable letter                to retain the required submission of the
                                                    provide a copy of the 7 CFR part 250                    of credit, or an escrow account. The                   end product data schedule and to more
                                                    regulations to processors and a copy of                 distributing agency must determine the                 specifically describe the required
                                                    agreements to processors and the FNS                    dollar value of the financial protection,              processing yields of donated food,
                                                    Regional Office.                                        based on the quantity of donated foods                 which is currently referred to as the
                                                                                                            for which the processor is accountable.                yield. In the proposed § 250.33(a), we
                                                    2. Procurement Requirements, § 250.31
                                                                                                            In the proposed § 250.32(a), we propose                would require submission of the
                                                       The requirements for the procurement                 to include the current requirement that                currently required information on the
                                                    of goods and services under Federal                     the processor obtain such financial                    end product data schedule, with the
                                                    grants are established in 2 CFR part 200                protection but to remove the option to                 exception of the price charged for the
                                                    and USDA implementing regulations at                    obtain an escrow account, as it is little-             end product or other pricing
                                                    2 CFR part 400 and Part 416, as                         used and unnecessarily complicates this                information and the contract value of
                                                    applicable. In the proposed § 250.31(a),                section. However, we propose to require                the donated food. As described above,
                                                    we propose to indicate the applicability                that a multi-State processor provide the               in the proposed § 250.31, pricing
                                                    of these requirements to the                            performance bond or irrevocable letter                 information must be included in the
                                                    procurement of processed end products,                  of credit to FNS, in accordance with its               procurement of end products or other
                                                    distribution, or of other processing                    National Processing Agreement. We                      processing services relating to donated
                                                    services related to donated foods. We                   propose to clarify that the amount of the              foods. Inclusion of such information on
                                                    also propose to indicate that distributing              performance bond or letter of credit                   end product data schedules may be
                                                    or recipient agencies may use                           must be sufficient to cover at least 75                misleading, as it may lead some
                                                    procurement procedures that conform to                  percent of the value of donated foods in               recipient agencies to conclude that a
                                                    applicable State and local laws, as                     the processor’s physical or book                       competitive procurement has been
                                                    appropriate, but must ensure                            inventory, as determined annually, and                 performed by the distributing agency
                                                    compliance with the Federal                             at the discretion of FNS, for processors               under its In-State Processing Agreement
                                                    procurement requirements.                               under National Processing Agreements.                  or State Participation Agreement. Prices
                                                       In the proposed § 250.31(b), we would                For multi-state processors in their first              currently included on end product data
                                                    require specific information in                         year of participation in the processing                schedules generally reflect the highest
                                                    procurement documents, to assist                        program, the amount of the performance                 price that a processor would charge for
                                                    recipient agencies in ensuring that they                bond or letter of credit must be                       the finished end product and not
                                                    receive credit for the value of donated                 sufficient to cover 100 percent of the                 necessarily the actual price of the end
                                                    foods in finished end products. We                      value of donated foods, as determined                  product.
                                                    propose to require that procurement                     annually, and at the discretion of FNS.                  We also propose to require inclusion
                                                    documents include the price to be                       This proposed clarification would                      of the processing yield of donated food,
                                                    charged for the finished end product or                 codify existing Program policy.                        which may be expressed as the quantity
                                                    other processing service, the method of                    In the proposed § 250.32(b), we                     of donated food (e.g., pounds or cases)
                                                    end product sales that would be                         propose to indicate the conditions                     needed to produce a specific quantity of
                                                    utilized, an assurance that crediting for               under which the distributing or                        end product or as the percentage of
                                                    donated foods would be performed in                     recipient agency must call in the                      donated food returned in the finished
                                                    accordance with the applicable                          performance bond or letter of credit. We               end product. We propose to retain the
                                                    requirements for such method of sales                   also propose to indicate that FNS would                requirement that end product data
                                                    in proposed § 250.36, the contract value                call in the performance bond or letter of              schedules be approved by the
                                                    of the donated food in the finished end                 credit under the same conditions and                   distributing agency under In-State
                                                    products, and the location for the                      would ensure that any monies recovered                 Processing Agreements. We propose to
                                                    delivery of the finished end products.                  by FNS are reimbursed to distributing                  clarify that the end product data
                                                    We propose to remove current                            agencies for losses of entitlement foods.              schedules for products containing
                                                    requirements for the provision of                                                                              donated red meat or poultry must also
                                                    pricing information outside of the                      4. Ensuring Processing Yields of                       be approved by the Department, as is
                                                    procurement process, including:                         Donated Foods, § 250.33                                currently required under the
                                                       (1) The requirement in current                          In current § 250.30(c)(5), the processor            demonstration project. We propose to
                                                    § 250.30(c)(5)(ii) that pricing                         must submit, as part of the agreement                  require that, under National Processing
                                                    information be included with the end                    approval, information regarding the                    Agreements, end product data schedules
                                                    product data schedule; and                              production of an end product to ensure                 be approved by the Department. Lastly,
                                                       (2) The requirements in current                      that the distributing or recipient agency,             we propose to clarify that an end
                                                    § 250.30(d)(3) and (e)(2) that the                      as appropriate, receives the benefit of                product data schedule must be
                                                    processor provide pricing information                   the donated food processed. This                       submitted in a standard electronic
                                                    summaries to the distributing agency,                   information, called the end product data               format dictated by FNS, and approved
                                                    and the distributing agency provide                     schedule, must include the following:                  for each new end product that a
                                                    such information to recipient agencies,                    • A description of the end product;                 processor wishes to provide or for a
                                                    as soon as possible after completion of                    • The types and quantities of donated               previously approved end product in
                                                    the agreement.                                                                                                 which the ingredients or other pertinent
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                                                                                                            foods and other ingredients needed to
                                                                                                            produce a specific quantity of end                     information have been altered.
                                                    3. Protection of Donated Food Value,                                                                             In proposed § 250.33(b), we propose
                                                    § 250.32                                                product;
                                                                                                               • The yield for the donated food;                   to describe the different processing
                                                       In current § 250.30(c)(5)(viii)(B), the                 • The contract value of the donated                 yields of donated foods that may be
                                                    processor is required to obtain, and                    food; and                                              approved in end product data
                                                    furnish to the distributing agency,                        • Any pricing information in addition               schedules. In current § 250.30(c)(5)(ii),
                                                    financial protection to protect the value               to the charge for the end product or fee-              the processor must meet a 100 percent
                                                    of donated foods prior to their delivery                for-service.                                           yield in the processing of all


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                                                    1238                    Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules

                                                    substitutable donated foods (i.e.,                      end product, as determined by the                      replacement value of the donated food
                                                    generally all donated foods except beef,                Department, would be produced from a                   or commercial substitute only if the
                                                    pork and poultry). Under 100 percent                    specific quantity of donated food. The                 purchase of replacement foods is not
                                                    yield, the processor must ensure that                   standard yield is determined and                       feasible and the processor has received
                                                    100 percent of the raw donated food                     applied uniformly by the Department to                 approval. In-State processors would be
                                                    diverted for processing is returned in                  all processors for specific donated                    required to obtain distributing agency
                                                    the finished end product. Production                    foods. The established standard yield is               approval for such payment and multi-
                                                    loss of donated food must be accounted                  higher than the average yield under                    State processors would be required to
                                                    for by replacement with commercially                    normal commercial production and                       obtain FNS approval.
                                                    purchased food of the same generic                      serves to reward those processors that                    In current § 250.30(c)(5)(viii)(D), the
                                                    identity, of U.S. origin, and of equal or               can process donated foods most                         processor must credit the distributing or
                                                    better quality than the donated food. To                efficiently. If necessary, the processor               recipient agency, as appropriate, for the
                                                    demonstrate this, the processor must                    must use commercially purchased food                   sale of any by-products resulting from
                                                    report reductions in donated food                       of the same generic identity, of U.S.                  the processing of donated foods or of
                                                    inventories on performance reports.                     origin, and equal or better in all USDA                commercially purchased foods
                                                    These reductions must be reported in                    procurement specifications than the                    substituted for donated foods. Crediting
                                                    the amount of donated food contained                    donated food to provide the number of                  must be achieved through reduction of
                                                    in the finished end product rather than                 cases required to meet the standard                    the processing fee and must be in the
                                                    the amount that went into production.                   yield to the distributing or recipient                 amount received from such sale or the
                                                    We propose to include the current 100                   agency, as appropriate. Like guaranteed                market value of the by-products. We
                                                    percent yield requirement in the                        yield, standard yield ensures that the                 propose to include this requirement in
                                                    proposed § 250.33(b)(1). We propose to                  recipient agency would receive a                       the proposed § 250.33(d), but propose to
                                                    indicate that FNS may make exceptions                   specific quantity of end product, which                require crediting through invoice
                                                    to the 100 percent yield requirement, on                helps to ensure that it can meet its food              reductions or another means of
                                                    a case-by-case basis. Exceptions to the                 service needs. We propose to describe                  crediting. We also propose to clarify that
                                                    100 percent yield requirement can result                standard yield in the proposed                         the processor must credit the
                                                    in one of the alternate processing yields               § 250.33(b)(3).                                        appropriate agency for the net value
                                                    described below.                                           In the proposed § 250.33(c), we would               received from the sale of by-products
                                                      Processing of donated foods such as                   require that the processor compensate                  after subtraction of any documented
                                                    beef, pork, and poultry invariably                      the distributing or recipient agency, as
                                                                                                                                                                   expenses incurred in preparing the by-
                                                    results in significant loss of product,                 appropriate, for the loss of donated
                                                                                                                                                                   product for sale. We propose to remove
                                                    such as the bones in chicken or fat in                  foods, or for commercially purchased
                                                                                                                                                                   the requirement in current
                                                    beef and pork. Hence, the processing                    foods substituted for donated foods.
                                                                                                                                                                   § 250.30(c)(5)(viii)(D) that the processor
                                                    yield must take such losses into account                Processing of donated foods may
                                                                                                                                                                   credit the distributing or recipient
                                                    in the same manner that the processing                  sometimes result in finished end
                                                                                                                                                                   agency for the sale of donated food
                                                    of commercial product accounts for                      products that are wholesome but do not
                                                                                                                                                                   containers because the burden required
                                                    such losses. Currently, the three                       meet the specifications required for use
                                                                                                                                                                   to monitor the credit outweighed the
                                                    processing yields approved in end                       in the recipient agency’s food service. In
                                                                                                                                                                   value returned.
                                                    product data schedules to account for                   normal business practice, such products
                                                    such losses include guaranteed yield,                   are usually returned to production for                    In current § 250.30(i), the processor
                                                    guaranteed minimum yield, and                           processing into end products that meet                 must meet applicable Federal labeling
                                                    standard yield. In an effort to simplify                required specifications. These are often               requirements, and must follow the
                                                    the yield requirements and streamline                   called rework products. Loss of donated                procedures required for approval of
                                                    monitoring for distributing and                         foods may result for a number of                       labels for end products that claim to
                                                    recipient agencies we propose to limit                  reasons, including the processor’s                     meet meal pattern requirements in child
                                                    the processing yields to 100 percent                    failure to meet the required processing                nutrition programs. We propose to
                                                    yield, guaranteed yield, and standard                   yield or failure to produce end products               include these requirements in the
                                                    yield.                                                  that meet required specifications, as                  proposed § 250.33(e).
                                                      Under guaranteed yield, the processor                 described above, spoilage or damage of                 5. Substitution of Donated Foods,
                                                    must ensure that a specific quantity of                 donated foods in storage, or improper                  § 250.34
                                                    end product would be produced from a                    distribution of end products. In order to
                                                    specific quantity of donated food put                   compensate for such losses of donated                    We propose to include requirements
                                                    into production. The guaranteed yield                   foods, we propose to require that the                  for the substitution of donated foods in
                                                    for a specific product is determined and                processor:                                             the proposed § 250.34. Currently, in
                                                    agreed upon by the parties to the                          (1) Replace the lost donated food or                § 250.30(f)(1), the processing agreement
                                                    processing agreement, and, for In-State                 commercial substitute with                             may allow the processor to substitute
                                                    and Recipient Agency Processing                         commercially purchased food of the                     commercially purchased foods for all
                                                    Agreements, approved by the                             same generic identity, of U.S. origin,                 donated foods except donated beef, pork
                                                    Department. Guaranteed yield is                         and equal or better in all USDA                        and poultry without prior approval of
                                                    generally used when significant                         procurement specifications than the                    the Department. Substitution must be
                                                    variance is present across processors in                donated food; or                                       with commercially purchased foods of
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                                                    manufacturing and yield for a particular                   (2) Return end products that are                    the same generic identity, of U.S. origin,
                                                    end product. The guaranteed yield must                  wholesome but do not meet required                     and of equal or better quality than the
                                                    be indicated on the end product data                    specifications to production for                       donated foods. Under current
                                                    schedule. We propose to describe                        processing into the requisite quantity of              regulations, substitution of donated
                                                    guaranteed yield in the proposed                        end products that meet the required                    poultry is permitted with some
                                                    § 250.33(b)(2).                                         specifications; or                                     limitations in accordance with a
                                                      Under standard yield, the processor                      (3) Pay the distributing or recipient               processor’s USDA-approved
                                                    must ensure that a specific quantity of                 agency, as appropriate, for the                        substitution plan. Substitution of


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                                                                            Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules                                            1239

                                                    donated beef and pork is not permitted                     Donated food may be backhauled to a                 requirement. We also include the
                                                    under the current regulations.                          processor from a recipient agency                      current stipulation that a waiver may
                                                       As previously discussed in the                       facility when a recipient agency                       only be approved if the processor’s past
                                                    preamble, beginning in 2013, the                        determines that, despite earlier                       performance indicates that the quality of
                                                    Department used its regulatory waiver                   projections, it is unable to utilize the               the end product would not be adversely
                                                    authority, to permit processors with a                  donated food in its current form. Rather               affected.
                                                    Department-approved Processor Control                   than see it go to waste, the recipient                    Also, in current § 250.30(f)(1)(ii)(A),
                                                    Certification Program plan to substitute                agency provides the food to a processor                the processor may use donated poultry
                                                    commercially purchased beef and pork                    to process into a more usable form. In                 that has been substituted with
                                                    for donated beef and pork. The                          the proposed § 250.34(b), we propose to                commercially purchased poultry in any
                                                    commercial product must be of U.S.                      prohibit substitution or commingling of                processing activities conducted at its
                                                    origin, and of equal or better quality in               all backhauled donated foods and to                    facilities. Additionally, in current
                                                    all Departmental purchase                               require that the processor, if amenable                § 250.30(f)(2), substituted donated food
                                                    specifications than the donated food. In                to reformulation, process such end                     must be used by the processor and may
                                                    addition, only donated beef and pork                    products into end products for sale and                not be sold or disposed of in bulk form.
                                                    delivered to the processor from a USDA                  delivery to the same recipient agency                  In the proposed § 250.34(e), we propose
                                                    vendor may be substituted. Donated                      that provided them and not to any other                to include the current provision that the
                                                    beef and pork delivered to a processor                  recipient agency. In other words, the                  processor may use any substituted
                                                    from a recipient agency facility for                    recipient agency which backhauls a                     donated food in other processing
                                                    processing may not be substituted (this                 previously processed end product to a                  activities conducted at its facilities. We
                                                    process is commonly called                              processor for reformulation must in turn               propose to remove the stipulation, in
                                                    backhauling). In a similar manner,                      use the reformulated end products,                     current § 250.30(f)(4), that title to the
                                                    substitution of backhauled donated                      containing their backhauled product, in                substituted donated food passes to the
                                                    poultry is prohibited in current                        their food service. Additionally, we                   processor upon the initiation of
                                                    § 250.30(f)(1)(ii).                                     propose to prohibit the processor from                 processing of the end product with the
                                                       In the proposed § 250.34(a), we                      providing payment to the recipient                     commercial substitute. The transfer of
                                                    propose to permit a processor to                        agency in lieu of processing and                       title to donated foods, which are part of
                                                    substitute any donated food that is                     prohibit the distributing or recipient                 the Federal grant, is limited to the
                                                    delivered to it from a USDA vendor                      agency from transferring the backhauled                distributing agency or recipient agency,
                                                    with commercially purchased food of                     food to another processor.                             as the recipients of the grant.
                                                    the same generic identity, of U.S. origin,                 In current § 250.30(g), the processing              Subsequent donated food activities may
                                                    and of equal or better quality in all                   of donated beef, pork and poultry must                 be performed in accordance with
                                                    Departmental purchase specifications                    occur under Federal acceptance service                 Federal regulations and the terms of
                                                    than the donated food. We propose to                    grading in order to assure that                        processing agreements but would not
                                                    clarify that commercially purchased                     substitution and yield requirements are                include a further transfer of title.
                                                    beef, pork or poultry must meet the                     met and that end products conform with                    We propose to remove the
                                                    same specifications as donated product,                 the applicable end product data                        requirements in current
                                                    including inspection, grading, testing,                 schedule. Such grading is conducted by                 § 250.30(f)(1)(iii) that the processor
                                                    and humane handling standards, and                      the Department’s Agricultural Marketing                maintain documentation that it has not
                                                    must be approved by the Department in                   Service. The grader verifies the quality               reduced its level of commercial
                                                    advance of substitution. Hence, we                      and quantity of food that is put into                  production in exercising the option to
                                                    propose to remove the required                          production, and the quantity of end                    substitute commercially purchased
                                                    elements of a processor’s plan for                      products produced, and includes the                    foods for donated foods, or that it has
                                                    poultry substitution in current                         pertinent information on a grading                     made sufficient purchases to meet the
                                                    § 250.30(f)(1)(ii)(B).                                  certificate. The processor is responsible              100 percent yield requirement in
                                                       In current § 250.30(f)(1)(ii)(A),                    for paying the cost of the acceptance                  processing of donated foods. In addition
                                                    substitution of commercial poultry for                  service grading. In current § 250.30(f)(1),            to being virtually impossible to
                                                    donated poultry may be made before the                  the processor must maintain records                    determine, it is unlikely that a processor
                                                    processor actually receives a shipment                  (including grading certificates)                       would choose to process donated foods
                                                    of the donated poultry. In such case,                   necessary to document that substitution                if it were to adversely affect its
                                                    however, the processor assumes all risks                of all donated foods has been conducted                commercial activities. The requirement
                                                    if, due to changing market conditions or                in accordance with the requirements in                 that the processor compensate the
                                                    other reasons, the Department is unable                 7 CFR part 250. We propose to include                  distributing or recipient agency for
                                                    to purchase and deliver donated poultry                 all of these requirements in the                       failure to meet required processing
                                                    to the processor for processing. In the                 proposed § 250.34(c).                                  yields of donated foods, as in the
                                                    proposed § 250.34(a), we propose to                        In current § 250.30(g), the distributing            proposed § 250.33(f), is more
                                                    allow a processor the option to                         agency may approve a waiver of the                     appropriate, and effective, than a
                                                    substitute any donated food in advance                  grading requirement for donated beef,                  requirement that the processor make
                                                    of the receipt of the donated food                      pork, or poultry under certain                         specific purchases of foods in the
                                                    shipment and to more clearly describe                   conditions. We propose to include this                 commercial market.
                                                    the processor’s assumption of risk                      contingency, and retain the current
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                                                    should the Department be unable to                      conditions under which the distributing                6. Storage, Food Safety, Quality Control,
                                                    purchase and deliver any donated food                   agency may approve such a waiver, in                   and Inventory Management, § 250.35
                                                    so substituted. Lastly, we propose to                   the proposed § 250.34(d). However, we                     We propose to include requirements
                                                    require that commercially purchased                     propose to indicate that such waivers                  for the storage, food safety oversight,
                                                    food substituted for donated food meet                  may only be approved on a case by case                 quality control, and inventory
                                                    the same processing yield requirements                  basis—e.g., for a specific production                  management of donated foods provided
                                                    that would be required for the donated                  run. The distributing agency may not                   for processing in the proposed § 250.35.
                                                    food, as in the proposed § 250.33.                      approve a blanket waiver of the                        In current § 250.30(c)(5)(x), the


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                                                    1240                    Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules

                                                    processor must describe its quality                     acceptance service grading may not be                  utilization prior to the end of the school
                                                    control system and assure that an                       substituted for end products containing                year.
                                                    effective quality control system will be                donated foods. However, we propose to                     In current § 250.30(n)(3), a processor
                                                    maintained for the duration of its                      remove the requirement in current                      must pay the distributing agency for the
                                                    agreement. In the proposed § 250.35(a),                 § 250.30(i) that exterior shipping                     value of donated foods held in excess of
                                                    we would require the processor to                       containers or product labels for end                   allowed inventory levels at the end of
                                                    ensure the safe and effective storage of                products containing nonsubstitutable                   the year, as indicated on the June
                                                    donated foods, including compliance                     donated foods include such information                 performance report. However, in
                                                    with the general storage requirements in                to ensure their sale to eligible recipient             practice, the distributing agency often
                                                    current § 250.12, and to maintain an                    agencies. Such assurance may be made                   allows a processor to carry over such
                                                    effective quality control system at its                 through notification of the appropriate                donated foods into the next year of the
                                                    processing facilities. We propose to                    parties or by other means.                             agreement, in accordance with its
                                                    require the processor to maintain                          In current § 250.30(n)(1), a processor              authority to approve donated food
                                                    documentation to verify the                             is limited in the amount of donated                    inventories in excess of the six-month
                                                    effectiveness of its quality control                    foods for which it is accountable at any               limitation. The distributing agency may
                                                    system and to provide such                              one time. A processor may not have on                  also direct the processor, in accordance
                                                    documentation upon request.                             hand more than a six-month supply of                   with current § 250.12(e), to transfer
                                                       In current § 250.30(g), the processing               donated foods, based on an average                     donated foods held in excess of allowed
                                                    of donated beef, pork and poultry, and                                                                         levels to another distributing or
                                                                                                            amount utilized for that period.
                                                    of commercial meat products that                                                                               recipient agency, or processor, if the
                                                                                                            However, the distributing agency may,
                                                    contain any donated foods, must be                                                                             processor is unable to process such
                                                                                                            at the processor’s request, provide
                                                    performed in plants under continuous                                                                           foods. In the proposed § 250.35(e), we
                                                                                                            written approval to allow the processor
                                                    Federal meat or poultry inspection.                                                                            propose to clarify that the distributing
                                                                                                            to maintain a larger amount of donated
                                                    However, in States certified as having                                                                         agency may permit the processor to
                                                                                                            foods in inventory if it determines that
                                                    programs at least equal to Federal                                                                             carry over donated foods in excess of
                                                                                                            the processor may efficiently store and
                                                    standards, processing of such foods may                                                                        allowed levels into the next year of its
                                                                                                            process such an amount. The
                                                    be performed in plants under                                                                                   agreement, if the distributing agency
                                                                                                            distributing agency may not order
                                                    continuous State meat or poultry                                                                               determines that the processor may
                                                                                                            donated foods for delivery to a                        efficiently process such foods. We also
                                                    inspection for processed end products
                                                    that are utilized in the State, rather than             processor if it would result in excessive              propose to include the distributing
                                                    the Federal inspection. We propose to                   inventories, unless it has granted such                agency’s current option to direct the
                                                    simplify these regulations in the                       approval. We propose to include the                    processor to transfer or re-donate such
                                                    proposed § 250.35(b) by requiring that                  current limitation on inventories of                   donated foods to another distributing or
                                                    all processing of donated foods is                      donated foods at a processor in the                    recipient agency or processor. Lastly, we
                                                    conducted in compliance with all                        proposed § 250.35(d) and to clarify that               propose to clarify that, if these options
                                                    Federal, State, and local requirements                  distributing agencies are not permitted                are not practical, the distributing agency
                                                    relative to food safety.                                to submit food orders for processors                   must require the processor to pay for the
                                                       In the proposed § 250.35(c), we                      reporting no sales activity during the                 donated foods held in excess of allowed
                                                    propose to clarify that a processor may                 prior year’s contract period unless                    levels in an amount equal to the
                                                    commingle donated foods and                             documentation is submitted by the                      replacement value of the donated foods.
                                                    commercially purchased foods, unless                    processor which outlines specific plans                   In current § 250.30(j), when an
                                                    the processing agreement specifically                   for donated food drawdown, product                     agreement terminates, and is not
                                                    stipulates that the donated foods must                  promotion, or sales expansion. Many                    extended or renewed, the distributing
                                                    be used in processing, and not                          distributing agencies have adopted                     agency must direct the processor to
                                                    substituted, or the donated foods have                  ‘‘sweep’’ policies in which they transfer              return donated foods remaining in
                                                    been backhauled from a recipient                        excess processor inventories for one                   inventory or pay the distributing or
                                                    agency. However, we propose to clarify                  recipient agency to another recipient                  recipient agency as applicable for the
                                                    that such commingling must be                           agency or processor which is willing to                donated foods at the replacement value.
                                                    performed in a manner that ensures the                  accept it, to ensure that inventory is                 For substitutable donated foods, the
                                                    safe and efficient use of donated foods,                used effectively. For example, a                       distributing agency may also permit the
                                                    as well as compliance with substitution                 distributing agency may transfer a                     processor to return commercially
                                                    requirements, and with reporting of                     recipient agency’s remaining inventory                 purchased foods that meet substitution
                                                    donated food inventories on                             at a processor to another recipient                    requirements in place of the donated
                                                    performance reports, as required in 7                   agency that is willing to accept such                  foods or transfer the donated foods to
                                                    CFR part 250.                                           foods and use the foods efficiently. Such              other agencies with which it has entered
                                                       We also propose to require that                      policies provide an additional tool for                into agreements. In the proposed
                                                    processors ensure that commingling of                   distributing agencies to ensure that                   § 250.35(f), we propose to expand the
                                                    finished end products with other food                   donated foods are used efficiently and                 current options for the disposition of
                                                    products by distributors results in the                 that processors and recipient agencies                 substitutable donated foods at the
                                                    sale to recipient agencies of end                       effectively manage their donated food                  termination of an agreement to all
                                                    products that meet substitution                         inventories. We propose to include an                  donated foods, in accordance with our
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                                                    requirements. One way that this may be                  allowance for FNS to require an                        proposal in the proposed § 250.34 to
                                                    achieved is by affixing the applicable                  inventory transfer to another State                    permit substitution of all donated foods.
                                                    USDA certification stamp to the exterior                distributing agency or processor when                  We propose to clarify that the
                                                    shipping containers of such end                         inventories are determined to be                       disposition of donated foods may
                                                    products. This incorporates the                         excessive for a State distributing agency              include a transfer; i.e., the distributing
                                                    provision in current § 250.30(f)(1)(ii)(B)              or processor, i.e., more than six months               agency may permit a transfer of donated
                                                    that finished poultry end products that                 on-hand or exceeding the established                   foods to another State distributing
                                                    have not been produced under AMS                        inventory protection, to ensure full                   agency, with FNS approval, in


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                                                                            Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules                                             1241

                                                    accordance with current § 250.12(e). We                 that all systems of sales utilized must                distributing or recipient agency, as
                                                    also propose to permit the transfer of                  provide clear documentation of                         appropriate, at a net price that provides
                                                    commercially purchased foods that meet                  crediting for the value of the donated                 a discount from the commercial case
                                                    the substitution requirements in the                    foods contained in the end products.                   price for the value of the donated foods
                                                    proposed § 250.34 in place of the                          In current § 250.30(d)(1)(i), a                     contained in the end products. The
                                                    donated foods. We propose to permit                     processor may utilize a refund or rebate               processor then compensates the
                                                    the processor to pay the distributing or                system, in which the processor sells end               distributor for the discount provided for
                                                    recipient agency, as appropriate, for the               products to the distributing or recipient              the value of the donated food in its sale
                                                    donated foods only if returning or                      agency, as appropriate, at the                         of end products. We propose to permit
                                                    transferring the donated foods or                       commercial or gross price, and provides                end product sales under this system in
                                                    commercially purchasing food that                       the appropriate agency with a refund for               the proposed § 250.36(d), and to refer to
                                                    meets the substitution requirements is                  the contract value of donated foods                    it as the indirect discount system. We
                                                    not feasible and if FNS approval has                    contained in the end products. In                      propose to require the processor to
                                                    been granted. If the distributing agency                current § 250.30(e), a distributor may                 ensure that the distributor notify it of
                                                    requires the processor to pay for                       also sell end products received from the               such sales, at least on a monthly basis,
                                                    donated foods, we propose to require                    processor under a refund system, with                  through automated sales reports or other
                                                    such payment at the contract value or                   the processor responsible for providing                submission. We propose to remove the
                                                    replacement value, whichever is higher,                 the refund to the appropriate agency.                  requirement, in current § 250.30(k)(2),
                                                    rather than the several options for                     We propose to permit end product sales                 that the distributor apply to the
                                                    assigning the donated food value                        under this system, by either the                       processor for a refund under this
                                                    currently included in the regulations.                  processor or distributor, in the proposed              system.
                                                    We propose to include the current                       § 250.36(b). We propose to require the                    In current § 250.30(d)(2), and in
                                                    requirement that the processor pay the                  processor to remit the refund to the                   accordance with the definition in
                                                    cost of transporting any donated foods                  distributing or recipient agency, as                   current § 250.2, the processor may sell
                                                    when the agreement is terminated at the                 appropriate, within 30 days of receiving               end products to the distributing or
                                                    processor’s request or as a result of the               a request for a refund from the                        recipient agency at a ‘‘fee-for-service.’’
                                                    processor’s failure to comply with the                  appropriate agency. We propose to                      The fee-for-service includes all costs to
                                                    requirements of 7 CFR part 250.                         clarify that the refund request must be                produce the end product minus the
                                                       We propose to remove the stipulation                 in writing but may be transmitted via                  value of the donated food put into
                                                    in current § 250.30(j)(3) that funds                    email or other electronic means. We                    production. The processor must identify
                                                    received by distributing agencies from                  propose to remove the requirement in                   any charge for delivery of end products
                                                    payments for donated foods upon                         current § 250.30(k) that the recipient                 separately from the fee-for-service on its
                                                    termination of an agreement be used in                  agency submit a refund application to                  invoice. We propose to permit this
                                                    accordance with § 250.17(c). The                        receive a refund for the value of donated              method of end product sales in the
                                                    allowable use of funds accruing from                    foods in end products, as the term                     proposed § 250.36(e).
                                                    program operations, including funds                     ‘‘refund application’’ implies the                        In current § 250.30(e)(1)(iv), the
                                                    received by distributing agencies from                  submittal of a written form, which is not              processor may provide end products
                                                    payments for donated foods upon                         necessary. Additionally, we propose to                 sold under a fee-for-service system to a
                                                    termination of an agreement, is                         remove the 30-day, or quarterly, period                distributor for delivery to the
                                                    described in current § 250.17 and thus                  by which the distributing or recipient                 distributing or recipient agency. In such
                                                    the stipulation is no longer necessary.                 agency must currently submit such a                    cases, the processor must identify the
                                                                                                            request. Once end product sales are                    distributor’s delivery charge separately
                                                    7. End Product Sales and Crediting for                                                                         from the fee-for-service on its invoice or
                                                                                                            made, we would expect requests for
                                                    the Value of Donated Foods, § 250.36                                                                           may permit the distributor to bill the
                                                                                                            refunds to be made in an expeditious
                                                       In current § 250.30(d)(1), a processor               manner in the interest of the program.                 distributing or recipient agency
                                                    must sell end products to recipient                     The agency may determine how                           separately for the delivery of end
                                                    agencies under a system that assures                    frequently it wishes to receive its                    products. As a matter of policy, we have
                                                    such agencies receive credit or ‘‘value                 refunds, but refunds must be issued                    also permitted the processor to provide
                                                    pass-through’’ for the contract value of                more frequently than annually. To that                 written approval to the distributing or
                                                    donated food contained in the end                       end, we also propose to remove the                     recipient agency-contracted distributor
                                                    product. And, in current § 250.30(e), a                 option, in current § 250.30(k)(3), for the             to bill the distributing or recipient
                                                    processor must ensure that, when end                    processor to submit refunds that total                 agency, as appropriate, for the total case
                                                    products are provided to commercial                     $25 or less on a quarterly basis.                      price—i.e., for the fee-for-service and
                                                    distributors for sale and delivery to                      In current § 250.30(d)(1)(ii), the                  the delivery charge. In such cases, the
                                                    recipient agencies, such sales occur                    processor may utilize a discount system,               processor must ensure that the
                                                    under a system that provides such                       in which the processor sells end                       appropriate agency has advance
                                                    agencies with a credit for the contract                 products at a net price that provides a                notification of the fee-for-service and
                                                    value of donated food contained in the                  discount from the commercial case price                delivery charge. The processor must
                                                    end product. In the proposed                            for the value of the donated foods                     require that the distributor notify it of
                                                    § 250.36(a), we would require that the                  contained in the end products. We                      such sales, at least on a monthly basis,
                                                    sales of end products, either directly by               propose to permit end product sales                    through automated sales reports or other
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                                                    the processor or through a commercial                   under this system in the proposed                      submission, which may include email
                                                    distributor, be performed utilizing one                 § 250.36(c). We propose to refer to this               or other electronic means. We propose
                                                    of the methods of end product sales                     system as a direct discount system to                  to include these requirements in the
                                                    contained in this section, to ensure that               distinguish it from the method of end                  proposed § 250.36(e).
                                                    the distributing or recipient agency, as                product sales described in the following                  In current § 250.30(d)(1)(iii), the
                                                    appropriate, receives credit for the value              paragraph.                                             processor may sell end products to the
                                                    of donated foods contained in end                          In current § 250.30(e)(1)(ii), a                    distributing or recipient agency under
                                                    products. We also propose to require                    distributor may sell end products to the               an alternate method of end product


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                                                    1242                    Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules

                                                    sales that is approved by FNS and the                      (5) The quantity of end products                      In the proposed § 250.37(d), we would
                                                    distributing agency. In current                         delivered to each eligible recipient                   require processors to maintain specific
                                                    § 250.30(e)(1)(iii), the distributor may                agency; and                                            records to demonstrate compliance with
                                                    also sell end products under such an                       (6) The quantity of donated foods                   processing requirements in 7 CFR part
                                                    approved alternate method of sales.                     remaining at the end of the reporting                  250, including, for example, assurance
                                                    Such alternate methods of sale must                     period.                                                of receipt of donated food shipments,
                                                    ensure that the distributing or recipient                  In the proposed § 250.37(a), we                     production, sale, and delivery of end
                                                    agency, as appropriate, receives credit                 propose to retain the requirement that                 products, and crediting for donated
                                                    for the value of donated foods contained                the processor submit the performance                   foods contained in end products.
                                                    in the end products. We propose to                      report to the distributing agency (or to                 In accordance with current
                                                    include this option for both processor                  the recipient agency, in accordance with               § 250.19(a), accurate and complete
                                                    and distributor in the proposed                         a Recipient Agency Processing                          records must be maintained with
                                                    § 250.36(f).                                            Agreement) on a monthly basis. We                      respect to end products processed from
                                                                                                            propose to retain all of the currently                 donated foods. In the proposed
                                                       In the proposed § 250.36(g), we
                                                                                                            required information in the report. We                 § 250.37(e), we would require
                                                    propose to clarify that the contract value
                                                                                                            propose to require the processor to                    distributing agencies to maintain
                                                    of the donated foods must be used in
                                                                                                            include quantities of donated food                     specific records to demonstrate
                                                    crediting for donated foods in end
                                                                                                            losses. We propose to require that the                 compliance with processing
                                                    product sales and to refer to the
                                                                                                            processor also include grading                         requirements in 7 CFR Part 250,
                                                    definition of contract value included in                certificates and other documentation, as               including, for example, end product
                                                    current § 250.2. In the proposed                        requested by the distributing agency, to               data schedules, performance reports,
                                                    § 250.36(h), we would require that the                  support the information included in the                copies of audits, and documentation of
                                                    distributing agency provide the                         performance reports. Such                              the correction of any deficiencies
                                                    processor with a list of recipient                      documentation may include, for                         identified in such audits.
                                                    agencies eligible to purchase end                       example, bills of lading, invoices or                    In the proposed § 250.37(f), we would
                                                    products along with the quantity of raw                 copies of refund payments to verify                    require that recipient agencies maintain
                                                    donated food that is to be delivered to                 sales and delivery of end products to                  specific records to demonstrate
                                                    the processor for processing on behalf of               recipient agencies. We propose to retain               compliance with processing
                                                    each recipient agency. This would                       the current deadlines for the submission               requirements in 7 CFR part 250,
                                                    ensure that only eligible recipient                     of performance reports in the proposed                 including, for example, the receipt of
                                                    agencies receive end products, and in                   § 250.37(a).                                           end products purchased from processors
                                                    the amounts for which they are eligible.                   In the proposed § 250.37(b), we would               or distributors, crediting for the value of
                                                    For end products sold through                           require that the processor must include                donated foods included in end
                                                    distributors, we propose to require that                reductions in donated food inventories                 products, and procurement documents.
                                                    the processor provide the distributor                   on monthly performance reports only                      In accordance with current
                                                    with a list of eligible recipient agencies              after sales of end products have been                  § 250.18(b), the distributing agency must
                                                    and either the quantities of approved                   made, or after sales of end products                   make a continuing evaluation of
                                                    end products that each recipient agency                 through distributors have been                         processors and recipient agencies,
                                                    is eligible to receive, or the quantity of              documented. We propose to require                      through the review of performance
                                                    donated food allocated to each recipient                that, when a distributor sells end                     reports and other reports and records, to
                                                    agency along with the raw donated food                  products under a refund system, such                   ensure compliance with the
                                                    (pounds or cases) needed per case of                    documentation must be through the                      requirements of 7 CFR part 250. And, in
                                                    each approved end product.                              distributing or recipient agency’s                     accordance with current § 250.30(m)(3),
                                                    8. Reports, Records, and Reviews of                     request for a refund (under a refund                   the distributing agency must review and
                                                    Processor Performance, § 250.37                         system) or through the distributor’s                   analyze reports submitted by processors
                                                                                                            automated sales reports or other                       to ensure compliance with such
                                                       In the proposed § 250.37, we propose                 electronic or written submission (under                requirements. We propose to clarify the
                                                    to include the reporting and                            an indirect discount system or under                   review requirements for the distributing
                                                    recordkeeping requirements for the                      fee-for-service).                                      agency in the proposed § 250.37(g),
                                                    processing of donated foods, and the use                   In the proposed § 250.37(c), we would               including the review of performance
                                                    of such reports and records to review                   require that a multi-State processor                   reports to ensure that the processor:
                                                    processor performance. In current                       submit a summary performance report                      (1) Receives donated food shipments,
                                                    § 250.30(m), the processor must submit                  to FNS, on a monthly basis and in a                    as applicable;
                                                    a monthly performance report to the                     standard format established by FNS,                      (2) Delivers end products to eligible
                                                    distributing agency, including the                      containing information from the                        recipient agencies, in the types and
                                                    following information for the reporting                 performance report that would allow                    quantities for which they are eligible;
                                                    period, with year-to-date totals:                       FNS to track the processor’s total and                   (3) Meets the required processing
                                                       (1) A list of all eligible recipient                 State-by-State donated food inventories.               yields for donated foods; and
                                                    agencies receiving end products;                        The purpose of this report is to assess                  (4) Accurately reports donated food
                                                                                                            the amount of the performance bond or                  inventory activity and maintains
                                                       (2) The quantity of donated foods on                 letter of credit required of the processor             inventories within approved levels.
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                                                    hand at the beginning of the reporting                  under its National Processing                            We propose to remove the
                                                    period;                                                 Agreement. However, each distributing                  requirements in current § 250.30(m)(2)
                                                       (3) The quantity of donated foods                    agency would still be responsible for                  and (n)(2) relating to the submission of
                                                    received;                                               monitoring the multi-State processor’s                 reports and the performance of reviews
                                                       (4) The quantity of donated foods                    inventory of donated foods received for                to ensure that substitution of
                                                    transferred to the processor from                       processing in the respective State, in                 concentrated skim milk for donated
                                                    another entity, or transferred by the                   accordance with the proposed                           nonfat dry milk is in compliance with
                                                    processor to another entity;                            § 250.37(a).                                           requirements. Donated nonfat dry milk


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                                                                            Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules                                            1243

                                                    is no longer available for donation to                  performance reports). However, a list of               Management and Budget (OMB) in
                                                    schools.                                                recipient agencies eligible to receive end             conformance with Executive Order
                                                                                                            products need not be included.                         12866.
                                                    9. Provisions of Agreements, § 250.38
                                                                                                               In the proposed § 250.38(e), we
                                                       In the proposed § 250.38, we include                                                                        B. Regulatory Impact Analysis
                                                                                                            propose to prohibit a distributing or
                                                    the required provisions for each type of                recipient agency, as appropriate, from                   This rule has been designated as not
                                                    processing agreement included in the                    extending or renewing an agreement                     significant by the Office of Management
                                                    proposed § 250.30, to ensure                            when a processor has not complied with                 and Budget, therefore, no Regulatory
                                                    compliance with the requirements in 7                   processing requirements. We propose to                 Impact Analysis is required.
                                                    CFR part 250. In the proposed                           allow a distributing or recipient agency
                                                    § 250.38(a), we propose to establish that                                                                      C. Regulatory Flexibility Act
                                                                                                            to immediately terminate an agreement
                                                    the National Processing Agreement is                    in the event of such noncompliance.                      The Regulatory Flexibility Act (5
                                                    inclusive of all provisions necessary to                                                                       U.S.C. 601–612) requires Agencies to
                                                    ensure that a multi-State processor                     10. Miscellaneous Provisions, § 250.39                 analyze the impact of rulemaking on
                                                    complies with all applicable                              In current § 250.30(q), FNS may waive                small entities and consider alternatives
                                                    requirements relating to the processing                 any of the requirements in 7 CFR part                  that would minimize any significant
                                                    of donated foods. FNS has developed a                   250 for the purpose of conducting                      impacts on a substantial number of
                                                    prototype National Processing                           demonstration projects to test program                 small entities. Pursuant to that review,
                                                    Agreement that includes all such                        changes which might improve                            the Administrator of FNS has certified
                                                    required provisions.                                    processing of donated foods. We                        that this rule would not have a
                                                       In the proposed § 250.38(b), we would                propose to include this provision with                 significant impact on a substantial
                                                    require that the State Participation                    minimal change in the proposed                         number of small entities.
                                                    Agreement with a multi-State processor                  § 250.39(a).
                                                    contain specific provisions or                                                                                 D. Unfunded Mandates Reform Act
                                                                                                              In the proposed § 250.39(b), we
                                                    attachments to assure compliance with                   propose to retain the requirement in                      Title II of the Unfunded Mandates
                                                    requirements in 7 CFR part 250 that are                 current § 250.30(p) that the distributing              Reform Act of 1995 (UMRA), Public
                                                    not included in the multi-State                         agency develop and provide a                           Law 104–4, establishes requirements for
                                                    processor’s National Processing                         processing manual or similar materials                 Federal agencies to assess the effects of
                                                    Agreement. Such provisions include, for                 to processors and other parties to ensure              their regulatory actions on State, local
                                                    example, a list of recipient agencies                   sufficient guidance is given to                        and tribal governments and the private
                                                    eligible to receive end products,                       processors and other parties to permit                 sector. Under section 202 of the UMRA,
                                                    summary end product data schedules                      compliance with requirements for the                   the Department generally must prepare
                                                    that contain a list of end products that                processing of donated foods. Consistent                a written statement, including a cost
                                                    may be sold in the State, a requirement                 with the current demonstration project,                benefit analysis, for proposed and final
                                                    that processors enter into a written                    the distributing agency would be                       rules with ‘‘Federal mandates’’ that may
                                                    agreement with distributors handling                    permitted to provide additional                        result in expenditures by State, local or
                                                    end products containing donated foods,                  information relating to State-specific                 Tribal governments, in the aggregate, or
                                                    and the allowed method(s) of end                        processing procedures upon request.                    the private sector, of $146 million or
                                                    product sales implemented by the                          In the proposed § 250.39(c), we                      more (when adjusted for inflation; GDP
                                                    distributing agency.                                    propose to clarify that guidance or                    deflator source: Table 1.1.9 at http://
                                                       In the proposed § 250.38(c), we would                                                                       www.bea.gov/iTable) in any one year.
                                                                                                            information relating to the processing of
                                                    require that the In-State Processing                                                                           When such a statement is needed for a
                                                                                                            donated foods is included on the FNS
                                                    Agreement contain specific provisions                                                                          rule, Section 205 of the UMRA generally
                                                                                                            Web site or may otherwise be obtained
                                                    or attachments to assure compliance                                                                            requires the Department to identify and
                                                                                                            from FNS. Such guidance and
                                                    with requirements in 7 CFR part 250.                                                                           consider a reasonable number of
                                                                                                            information includes program
                                                    Most of these provisions are included in                                                                       regulatory alternatives and adopt the
                                                                                                            regulations and policies, the FNS Audit
                                                    current § 250.30(c)(5) and include, for                                                                        most cost effective or least burdensome
                                                                                                            Guide, and the USDA National
                                                    example, assurance that the processor                                                                          alternative that achieves the objectives
                                                                                                            Processing Agreement.
                                                    will meet processing yields for donated                                                                        of the rule.
                                                    foods and substitution requirements,                    III. Procedural Matters                                   This proposed rule does not contain
                                                    report donated food inventory activity                                                                         Federal mandates (under the regulatory
                                                                                                            A. Executive Order 12866 and 13563
                                                    and maintain inventories within                                                                                provisions of Title II of the UMRA) for
                                                    approved levels, enter into a written                      Executive Orders 12866 and 13563                    State, local, and Tribal governments or
                                                    agreement with distributors handling                    direct agencies to assess all costs and                the private sector of $146 million or
                                                    end products containing donated foods,                  benefits of available regulatory                       more in any one year. Thus, the rule is
                                                    credit recipient agencies for the value of              alternatives and, if regulation is                     not subject to the requirements of
                                                    all donated foods contained in end                      necessary, to select regulatory                        sections 202 and 205 of the UMRA.
                                                    products, and obtain required audits.                   approaches that maximize net benefits
                                                       In accordance with the proposed                      (including potential economic,                         E. Executive Order 12372
                                                    § 250.38(d), we propose to require that                 environmental, public health and safety                  The donation of foods in USDA food
                                                    the Recipient Agency Processing                         effects, distributive impacts, and                     distribution and child nutrition
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                                                    Agreement contain the same provisions                   equity). Executive Order 13563                         programs is included in the Catalog of
                                                    as an In-State Processing Agreement, to                 emphasizes the importance of                           Federal Domestic Assistance under
                                                    the extent that the distributing agency                 quantifying both costs and benefits, of                10.555, 10.558, 10.559, 10.565, 10.567,
                                                    permits the recipient to perform                        reducing costs, of harmonizing rules,                  and 10.569 is subject to Executive Order
                                                    activities normally performed by the                    and of promoting flexibility.                          12372, which requires
                                                    distributing agency under an In-State                      This proposed rule has been                         intergovernmental consultation with
                                                    Processing Agreement (e.g., approval of                 determined to be not significant and                   State and local officials. (See 2 CFR
                                                    end product data schedules or review of                 was not reviewed by the Office of                      chapter IV)


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                                                    1244                    Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules

                                                    F. Federalism Summary Impact                            invites the general public and other                   performance report is expected to take
                                                    Statement                                               public agencies to comment on this                     1 hour to complete, for a total annual
                                                      Executive Order 13132 requires                        proposed information collection. This                  burden of 1320.00 hours.
                                                    Federal agencies to consider the impact                 collection is a revision of a currently                   • § 250.30(i), Agreements between
                                                    of their regulatory actions on State and                approved collection, OMB#0584–0293.                    Processors and Distributors. A processor
                                                    local governments. Where such actions                      Written comments must be received                   providing end products containing
                                                    have federalism implications, agencies                  on or before March 6, 2017. Comments                   donated foods to a distributor must
                                                    are directed to provide a statement for                 are invited on: (a) Whether the proposed
                                                                                                                                                                   enter into a written agreement with the
                                                    inclusion in the preamble to the                        collection of information is necessary
                                                                                                                                                                   distributor. The agreement must include
                                                    regulations describing the agency’s                     for the proper performance of the
                                                                                                                                                                   the financial liability for the
                                                    considerations in terms of the three                    functions of the agency, including
                                                                                                                                                                   replacement value of donated foods,
                                                    categories called for under Section                     whether the information shall have
                                                                                                                                                                   monthly end product sales reporting
                                                    (6)(b)(2)(B) of Executive Order 13121.                  practical utility; (b) the accuracy of the
                                                                                                                                                                   frequency, requirements under 250.11,
                                                      The Department has considered the                     agency’s estimate of the burden of the
                                                                                                                                                                   and the applicable value pass through
                                                    impact of this rule on State and local                  proposed collection of information,
                                                                                                                                                                   system. These agreements can be
                                                    governments and has determined that                     including the validity of the
                                                                                                                                                                   considered permanent, with
                                                    this rule does not have federalism                      methodology and assumptions that were
                                                                                                                                                                   amendments made as necessary. We
                                                    implications. Therefore, under section                  used; (c) ways to enhance the quality,
                                                                                                            utility, and clarity of the information to             estimate that 225 respondents will enter
                                                    6(b) of the Executive Order, a federalism                                                                      into an agreement in the first year and
                                                    summary is not required.                                be collected; and (d) ways to minimize
                                                                                                            the burden of the collection of                        5 will amend their agreements each year
                                                    G. Civil Rights Impact Analysis                         information on those who are to                        for the next 2 years, with 2.0 hours per
                                                      FNS has reviewed this proposed rule                   respond, including use of appropriate                  response. The estimated annual
                                                    in accordance with USDA Regulation                      automated, electronic, mechanical, or                  reporting burden for this activity is
                                                    4300–4, ‘‘Civil Rights Impact Analysis,’’               other technological collection                         156.66 hours.
                                                    to identify any major civil rights                      techniques or other forms of information                  • § 250.33(a), End Product Data
                                                    impacts the rule might have on program                  technology.                                            Schedules. Processors must submit end
                                                    participants on the basis of age, race,                    Comments will be accepted through                   product data schedules, in a standard
                                                    color, national origin, sex or disability.              the Federal eRulemaking Portal. Go to                  electronic form dictated by FNS for
                                                    After a careful review of the rule’s intent             http://www.regulations.gov, and follow                 approval by FNS (for National
                                                    and provisions, FNS has determined                      the online instructions for submitting                 Processing Agreements) or by the State
                                                    that this rule would not in any way                     comments electronically. Comments                      distributing agency (for In-State
                                                    limit or reduce the ability of                          may also be sent to Kiley Larson, at the               Processing Agreements) for each new
                                                    participants to receive the benefits of                 address listed in the ADDRESSES section                product that a processor wishes to
                                                    donated foods in food distribution or                   of this preamble. Commenters are asked                 provide or for a previously approved
                                                    child nutrition programs on the basis of                to separate their comments on the                      end product in which the ingredients
                                                    an individual’s or group’s race, color,                 information collection requirements                    have been altered. All products
                                                    national origin, sex, age, or disability.               from their comments on the proposed                    containing donated red meat and
                                                    FNS found no factors that would                         rule.                                                  poultry must have their end product
                                                    negatively and disproportionately affect                  Title: Food Distribution Forms.                      data schedules approved by USDA. The
                                                    any group of individuals.                                 OMB Number: 0584–0293.                               end product data schedule must include
                                                                                                              Expiration Date: 11/30/2016.                         a description of the end product, the
                                                    H. Executive Order 13175                                  Type of Request: Revision of a                       donated foods and other ingredients
                                                      Executive Order 13175 requires                        currently approved collection.                         included in the end product, the
                                                    Federal agencies to consult and                           Abstract: This is a revision of an
                                                                                                                                                                   quantity of the end product produced,
                                                    coordinate with Tribes on a                             existing information collection based on
                                                                                                                                                                   and the processing yield of the donated
                                                    government-to-government basis on                       this proposed rule, Revisions and
                                                                                                                                                                   food. We expect 131 processors to
                                                    policies that have Tribal implications,                 Clarifications in Requirements for the
                                                                                                                                                                   provide end product data schedules to
                                                    including regulations, legislative                      Processing of Donated Foods. The rule
                                                                                                                                                                   FNS or the State distributing agency 12
                                                    comments or proposed legislation, and                   proposes to add reporting requirements
                                                                                                                                                                   times a year. The estimated time for
                                                    other policy statements or actions that                 to the existing information collection
                                                                                                                                                                   each response is 0.5 hours, for a total of
                                                    have substantial direct effects on one or               associated with 7 CFR part 250, OMB
                                                                                                                                                                   786 burden hours.
                                                    more Indian Tribes, on the relationship                 Number 0584–0293 as follows:
                                                    between the Federal Government and                                                                                In addition to the above reporting
                                                                                                            New Reporting Requirements                             requirements, FNS has reviewed the
                                                    Indian Tribes, or on the distribution of
                                                                                                            Associated With This Rulemaking                        information collection associated with 7
                                                    power and responsibilities between the
                                                    Federal Government and Indian Tribes.                     • § 250.37(c), Summary Performance                   CFR part 250 and determined that
                                                    FNS consulted with Tribes on this                       Report. Multi-State processors submit a                several reporting and recordkeeping
                                                    proposed rule on November 19, 2014,                     summary performance report to FNS.                     requirements require update due to
                                                    however no concerns or comments were                    The summary performance report lists                   changes in historical averages and/or
                                                                                                            the complete donated food inventory at                 duplicate counting. Those adjustments
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                                                    received. We are unaware of any current
                                                    Tribal laws that could be in conflict                   the beginning and end of the reporting                 result in a net burden reduction of 5,177
                                                    with the final rule.                                    month and the total donated food                       hours. The table below summarizes the
                                                                                                            inventory by State and the national                    changes to the burden for OMB Number
                                                    I. Paperwork Reduction Act                              total. Approximately 110 respondents                   0584–0293. For additional details, see
                                                       In accordance with the Paperwork                     are expected to submit 12 summary                      the information collection material
                                                    Reduction Act of 1995, this notice                      performance reports per year. Each                     included in the docket to this rule.




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                                                                                    Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules                                                      1245

                                                                                                                                              Number of                                   Estimated total
                                                                                                                   Estimated number                                  Total annual                             Estimated total
                                                                      Affected public                                                       responses per                                   hours per
                                                                                                                    of respondents                                    responses                                   burden
                                                                                                                                              respondent                                    response

                                                                                                                                              Reporting

                                                    State, Local, and Tribal Governments ...                                 20,866                     11.13            232,319.24                   0.25          58,679.50
                                                    Private For Profit ....................................                   2,812                    306.43            861,681.33                   0.03          26,093.88
                                                    Private Not for Profit ..............................                     1,600                      2.03              3,240.00                   0.19             614.50
                                                    Individual ................................................          611,200.00                      1.96          1,199,200.00                   0.25         304,400.00

                                                          Total Estimated Reporting Burden                               636,478.00                       3.61         2,296,440.57                   0.17         389,787.88

                                                                                                                                           Recordkeeping

                                                    State, Local, and Tribal Governments ...                                20,866.00                   22.58            471,130.46                   0.08          35,413.02
                                                    Private For Profit ....................................                     2,812                  367.86          1,034,429.00                   0.06          62,671.72
                                                    Private Not for Profit ..............................                       1,600                    7.99             12,782.00                  52.63         672,662.29
                                                    Individual ................................................                     0                    0.00                  0.00                   0.00               0.00

                                                          Total Estimated Recordkeeping
                                                            Burden .........................................                25,278.00                   60.07          1,518,341.46                   0.51         770,747.03

                                                                                                                              Total of Reporting and Recordkeeping

                                                    Reporting ...............................................            636,478.00                      3.61          2,296,440.57                   0.17         389,787.88
                                                    Recordkeeping .......................................                 25,278.00                     60.07          1,518,341.46                   0.51         770,747.03

                                                          Total ................................................         636,478.00                       5.99         3,814,782.03                   0.30       1,160,534.91



                                                    J. E-Government Act Compliance                                      Processing Agreement, Recipient                         donated foods and to purchase the
                                                       The Department is committed to                                   Agency Processing Agreement,                            finished end products.
                                                    complying with the E-Government Act,                                Replacement value, and State                            *     *     *      *    *
                                                    to promote the use of the Internet and                              Participation Agreement.                                   Replacement value means the price
                                                                                                                          The revisions and additions read as                   assigned by the Department to a donated
                                                    other information technologies to
                                                                                                                        follows:                                                food which must reflect the current
                                                    provide increased opportunities for
                                                    citizen access to Government                                        § 250.2     Definitions.                                price in the market to ensure
                                                    information and services, and for other                                                                                     compensation for donated foods lost in
                                                                                                                        *     *      *    *     *
                                                    purposes.                                                                                                                   processing or other activities. The
                                                                                                                          Backhauling means the delivery of
                                                                                                                                                                                replacement value may be changed by
                                                    List of Subjects in 7 CFR Part 250                                  donated foods to a processor for
                                                                                                                                                                                the Department at any time.
                                                                                                                        processing from a distributing or
                                                      Administrative practice and                                       recipient agency’s storage facility.                    *     *     *      *    *
                                                    procedure, Food assistance programs,                                                                                           State Participation Agreement means
                                                    Grant programs, Social programs,                                    *     *      *    *     *
                                                                                                                          Commingling means the storage of                      a distributing agency’s agreement with a
                                                    Reporting and recordkeeping                                                                                                 multi-State processor to permit the sale
                                                                                                                        donated foods together with
                                                    requirements, Surplus agricultural                                                                                          of finished end products produced
                                                                                                                        commercially purchased foods.
                                                    commodities.                                                                                                                under the processor’s National
                                                                                                                        *     *      *    *     *                               Processing Agreement to eligible
                                                      Accordingly, 7 CFR part 250 is
                                                                                                                          End product data schedule means a
                                                    proposed to be amended as follows:                                                                                          recipient agencies in the State or to
                                                                                                                        processor’s description of its processing
                                                                                                                                                                                directly purchase such finished end
                                                    PART 250—DONATION OF FOODS                                          of donated food into a finished end
                                                                                                                                                                                products.
                                                    FOR USE IN THE UNITED STATES, ITS                                   product, including the processing yield
                                                                                                                        of donated food.                                        *     *     *      *    *
                                                    TERRITIORIES AND POSSESSIONS                                                                                                ■ 3. In § 250.11, revise paragraph (e) to
                                                    AND AREAS UNDER ITS                                                 *     *      *    *     *
                                                                                                                          In-State Processing Agreement means                   read as follows:
                                                    JURISDICTION
                                                                                                                        a distributing agency’s agreement with                  § 250.11 Delivery and receipt of donated
                                                    ■ 1. The authority citation for Part 250                            an in-State processor to process donated                food shipments.
                                                    continues to read as follows:                                       foods into finished end products for sale               *      *    *     *       *
                                                      Authority: 5 U.S.C. 301; 7 U.S.C. 612c,                           to eligible recipient agencies or for sale                 (e) Transfer of title. In general, title to
                                                    612c note, 1431, 1431b, 1431e, 1431 note,                           to the distributing agency.                             donated foods transfers to the
                                                    1446a–1, 1859, 2014, 2025; 15 U.S.C. 713c;                          *     *      *    *     *                               distributing agency or recipient agency,
                                                    22 U.S.C. 1922; 42 U.S.C. 1751, 1755, 1758,                           National Processing Agreement means                   as appropriate, upon acceptance of the
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                                                    1760, 1761, 1762a, 1766, 3030a, 5179, 5180.                         an agreement between FNS and a multi-                   donated foods at the time and place of
                                                    ■ 2. In § 250.2:                                                    State processor to process donated foods                delivery. Title to donated foods
                                                    ■ a. Remove definitions of Contracting                              into end products for sale to distributing              provided to a multi-State processor, in
                                                    agency and Fee-for-service.                                         or recipient agencies.                                  accordance with its National Processing
                                                    ■ b. Add definitions in alphabetical                                *     *      *    *     *                               Agreement, transfers to the distributing
                                                    order for Backhauling, Commingling,                                   Recipient Agency Processing                           agency or recipient agency, as
                                                    End product data schedule, In-State                                 Agreement means a recipient agency’s                    appropriate, upon acceptance of the
                                                    Processing Agreement, National                                      agreement with a processor to process                   finished end products at the time and


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                                                    1246                    Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules

                                                    place of delivery. However, when a                      donated foods, in accordance with                      processing agreements are described in
                                                    recipient agency has contracted with a                  § 250.16, or in other sanctions or                     this section.
                                                    distributor to act as an authorized agent,              corrective actions.                                       (c) National Processing Agreement. A
                                                    title to finished end products containing               *     *    *      *     *                              multi-State processor must enter into a
                                                    donated foods transfers to the recipient                                                                       National Processing Agreement with
                                                                                                            ■ 6. Revise Subpart C to read as follows:
                                                    agency upon delivery and acceptance by                                                                         FNS in order to process donated foods
                                                    the contracted distributor.                             Subpart C—Processing of Donated Foods                  into end products in accordance with
                                                    Notwithstanding transfer of title,                      Sec.                                                   end product data schedules approved by
                                                    distributing and recipient agencies must                250.30 Processing of donated foods into end            FNS. FNS also holds and manages such
                                                    ensure compliance with the                                   products.                                         processor’s performance bond or letter
                                                    requirements of this part in the                        250.31 Procurement requirements.                       of credit under its National Processing
                                                    distribution, control, and use of donated               250.32 Protection of donated food value.               Agreement, in accordance with § 250.32.
                                                                                                            250.33 Ensuring processing yields of                   FNS does not itself procure or purchase
                                                    foods.
                                                                                                                 donated foods.
                                                    *      *     *     *    *                               250.34 Substitution of donated foods.
                                                                                                                                                                   end products under a National
                                                    ■ 4. In § 250.18, revise paragraph (b) to               250.35 Storage, food safety, quality control,          Processing Agreement. A multi-State
                                                    read as follows:                                             and inventory management.                         processor must also enter into a State
                                                                                                            250.36 End product sales and crediting for             Participation Agreement with the
                                                    § 250.18   Reporting requirements.                           the value of donated foods.                       distributing agency in order to sell
                                                    *     *     *      *    *                               250.37 Reports, records, and reviews of                nationally approved end products in the
                                                      (b) Processor performance. Processors                      processor performance.                            State, in accordance with paragraph (d)
                                                    must submit performance reports and                     250.38 Provisions of agreements.                       of this section.
                                                    other supporting documentation, as                      250.39 Miscellaneous provisions.                          (d) State Participation Agreement.
                                                    required by the distributing agency or                                                                         The distributing agency must enter into
                                                    by FNS, in accordance with § 250.37(a),                 Subpart C—Processing of Donated
                                                                                                                                                                   a State Participation Agreement with a
                                                    to ensure compliance with requirements                  Foods
                                                                                                                                                                   multi-State processor to permit the sale
                                                    in this part.                                           § 250.30 Processing of donated foods into              of end products produced under the
                                                    *     *     *      *    *                               end products.                                          processor’s National Processing
                                                    ■ 5. In § 250.19, revise paragraph (a) to                                                                      Agreement to eligible recipient agencies
                                                                                                              (a) Purpose of processing donated
                                                    read as follows:                                        foods. Donated foods are most                          in the State or to directly purchase such
                                                                                                            commonly provided to processors to                     end products. The distributing agency
                                                    § 250.19   Recordkeeping requirements.
                                                                                                            process into approved end products for                 may include other State-specific
                                                      (a) Required records. Distributing                                                                           processing requirements in its State
                                                    agencies, recipient agencies, processors,               use in school lunch programs or other
                                                                                                            food services provided by recipient                    Participation Agreement, such as the
                                                    and other entities must maintain records                                                                       methods of end product sales permitted,
                                                    of agreements and contracts, reports,                   agencies. The ability to divert donated
                                                                                                            foods for processing provides recipient                in accordance with § 250.36, or the use
                                                    audits, and claim actions, funds                                                                               of labels attesting to fulfillment of meal
                                                    obtained as an incident of donated food                 agencies with more options for using
                                                                                                            donated foods in their programs. For                   pattern requirements in child nutrition
                                                    distribution, and other records                                                                                programs. The distributing agency must
                                                    specifically required in this part or in                example, donated foods such as whole
                                                                                                            chickens or chicken parts may be                       utilize the following criteria in its
                                                    other Departmental regulations, as
                                                                                                            processed into precooked grilled                       selection of processors with which it
                                                    applicable. In addition, distributing
                                                                                                            chicken strips for use in the National                 enters into agreements. These criteria
                                                    agencies must keep a record of the value
                                                                                                            School Lunch Program. In some cases,                   will be reviewed by the appropriate FNS
                                                    of donated foods each of its school food
                                                                                                            donated foods are provided to                          Regional Office during the management
                                                    authorities receives, in accordance with
                                                                                                            processors to prepare meals or for                     evaluation review of the distributing
                                                    § 250.58(e), and records to demonstrate
                                                                                                            repackaging. A processor’s use of a                    agency.
                                                    compliance with the professional                                                                                  (1) The nutritional contribution
                                                    standards for distributing agency                       commercial facility to repackage
                                                                                                            donated foods, or to use donated foods                 provided by end products;
                                                    directors established in § 235.11(g) of                                                                           (2) The marketability or acceptability
                                                    this chapter. Processors must also                      in the preparation of meals, is
                                                                                                                                                                   of end products;
                                                    maintain records documenting the sale                   considered processing in this part.                       (3) The means by which end products
                                                    of end products to recipient agencies,                    (b) Agreement requirement. The                       will be distributed;
                                                    including the sale of such end products                 processing of donated foods must be                       (4) Price competitiveness of end
                                                    by distributors, and must submit                        performed in accordance with an                        products and processing yields of
                                                    monthly performance reports, in                         agreement between the processor and                    donated foods;
                                                    accordance with Subpart C of this part                  FNS, between the processor and the                        (5) Any applicable labeling
                                                    and with any other recordkeeping                        distributing agency, or, if allowed by the             requirements; and
                                                    requirements included in their                          distributing agency, between the                          (6) The processor’s record of ethics
                                                    agreements. Specific recordkeeping                      processor and a recipient agency or                    and integrity, and capacity to meet
                                                    requirements relating to the use of                     subdistributing agency. However, a                     regulatory requirements.
                                                    donated foods in contracts with food                    processing agreement will not obligate                    (e) In-State Processing Agreement. A
                                                    service management companies are                        any party to provide donated foods to a                distributing agency must enter into an
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                                                    included in § 250.54. Failure of the                    processor for processing. The                          In-State Processing Agreement with an
                                                    distributing agency, recipient agency,                  agreements described below are                         in-State processor to process donated
                                                    processor, or other entity to comply                    required in addition to, not in lieu of,               foods into finished end products, unless
                                                    with recordkeeping requirements must                    competitively procured contracts                       it permits recipient agencies to enter
                                                    be considered prima facie evidence of                   required in accordance with § 250.31.                  into Recipient Agency Processing
                                                    improper distribution or loss of donated                The processing agreement must be                       Agreements for such purpose, in
                                                    foods and may result in a claim against                 signed by an authorized individual for                 accordance with paragraph (f) of this
                                                    such party for the loss or misuse of                    the processor. The different types of                  section. Under an In-State Processing


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                                                                            Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules                                                1247

                                                    Agreement, the distributing agency                      Agency Processing Agreements must be                   recipient agency and a processor may be
                                                    approves end product data schedules                     reviewed and approved by the                           up to five years in duration. National
                                                    (except red meat and poultry) submitted                 distributing agency. All recipient                     Processing Agreements are permanent.
                                                    by the processor, holds and manages the                 agencies must utilize the following                    Amendments to any agreements may be
                                                    processor’s performance bond or letter                  criteria in its selection of processors                made, as needed, with the concurrence
                                                    of credit, in accordance with § 250.32,                 with which it enters into agreements:                  of both parties to the agreement. Such
                                                    and assures compliance with other                          (1) The nutritional contribution                    amendments will be effective for the
                                                    processing requirements. The                            provided by end products;                              duration of the agreement, unless
                                                    distributing agency may also purchase                      (2) The marketability or acceptability              otherwise indicated.
                                                    the finished end products for                           of end products;
                                                    distribution to eligible recipient                         (3) The means by which end products                 § 250.31   Procurement requirements.
                                                    agencies in the State under an In-State                 will be distributed;                                     (a) Applicability of Federal
                                                    Processing Agreement, or may permit                        (4) Price competitiveness of end                    procurement requirements. Distributing
                                                    recipient agencies to purchase such end                 products and processing yields of                      and recipient agencies must comply
                                                    products, in accordance with applicable                 donated foods;                                         with the requirements in 2 CFR part 200
                                                    procurement requirements. In the latter                    (5) Any applicable labeling                         and part 400, as applicable, in
                                                    case, the In-State Processing Agreement                 requirements; and                                      purchasing end products, distribution,
                                                    is often called a ‘‘master agreement.’’ A                  (6) The processor’s record of ethics                or other processing services from
                                                    distributing agency that procures end                   and integrity, and capacity to meet                    processors. Distributing and recipient
                                                    products on behalf of recipient agencies,               regulatory requirements.                               agencies may use procurement
                                                    or that limits recipient agencies’ access                  (g) Ensuring acceptability of end                   procedures that conform to applicable
                                                    to the procurement of specific end                      products. A distributing agency that                   State or local laws and regulations, but
                                                    products through its master agreements,                 procures end products on behalf of                     must ensure compliance with the
                                                    must utilize the following criteria in its              recipient agencies, or that otherwise                  procurement requirements in 2 CFR
                                                    selection of processors with which it                   limits recipient agencies’ access to the               parts 200 and 400, as applicable.
                                                    enters into agreements. These criteria                  procurement of specific end products,                    (b) Required information in
                                                    will be reviewed by the appropriate FNS                 must provide for testing of end products               procurement documents. In all
                                                    Regional Office during the management                   to ensure their acceptability by recipient             procurements of processed end products
                                                    evaluation review of the distributing                   agencies, prior to entering into                       containing USDA donated foods,
                                                    agency:                                                 processing agreements. End products                    procurement documents must include
                                                       (1) The nutritional contribution                     that have previously been tested, or that              the following information:
                                                    provided by end products;                               are otherwise determined to be                           (1) The price to be charged for the end
                                                       (2) The marketability or acceptability               acceptable, need not be tested. However,               product or other processing service;
                                                    of end products;                                        such a distributing agency must monitor                  (2) The method of end product sales
                                                       (3) The means by which end products                  product acceptability on an ongoing                    that will be utilized and assurance that
                                                    will be distributed;                                    basis.                                                 crediting for donated foods will be
                                                       (4) Price competitiveness of end                        (h) Prohibition against subcontracting.             performed in accordance with the
                                                    products and processing yields of                       A processor may not assign any                         applicable requirements for such
                                                    donated foods;                                          processing activities under its                        method of sales in § 250.36;
                                                       (5) Any applicable labeling                          processing agreement or subcontract to                   (3) The value of the donated food in
                                                    requirements; and                                       another entity to perform any aspect of                the end products; and
                                                       (6) The processor’s record of ethics                 processing, without the specific written                 (4) The location for the delivery of the
                                                    and integrity, and capacity to meet                     consent of the other party to the                      end products.
                                                    regulatory requirements.                                agreement (i.e., distributing or recipient
                                                       (f) Recipient Agency Processing                      agency, or FNS, as appropriate). The                   § 250.32   Protection of donated food value.
                                                    Agreement. The distributing agency may                  distributing agency may, for example,                     (a) Performance bond or irrevocable
                                                    permit a recipient agency to enter into                 provide the required consent as part of                letter of credit. The processor must
                                                    an agreement with an in-State processor                 its State Participation Agreement or In-               obtain a performance bond or an
                                                    to process donated foods and to                         State Processing Agreement with the                    irrevocable letter of credit to protect the
                                                    purchase the finished end products in                   processor.                                             value of donated foods to be received for
                                                    accordance with a Recipient Agency                         (i) Agreements between Processors                   processing prior to the delivery of the
                                                    Processing Agreement. A recipient                       and Distributors. A processor providing                donated foods to the processor. The
                                                    agency may also enter into a Recipient                  end products containing donated foods                  processor must provide the performance
                                                    Agency Processing Agreement on behalf                   to a distributor must enter into a written             bond or letter of credit to the
                                                    of other recipient agencies, in                         agreement with the distributor. The                    distributing or recipient agency, in
                                                    accordance with an agreement between                    agreement must reference, at a                         accordance with its In-State or Recipient
                                                    the parties. The distributing agency may                minimum, the financial liability (i.e.,                Agency Processing Agreement.
                                                    also delegate a recipient agency to                     who must pay) for the replacement                      However, a multi-State processor must
                                                    approve end product data schedules or                   value of donated foods, not less than                  provide the performance bond or letter
                                                    select nationally approved end product                  monthly end product sales reporting                    of credit to FNS, in accordance with its
                                                    data schedules, review in-State                         frequency, requirements under § 250.11,                National Processing Agreement. For
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                                                    processor performance reports, manage                   and the applicable value pass through                  multi-State processors, the minimum
                                                    the performance bond or letter of credit                system to ensure that the value of                     amount of the performance bond or
                                                    of an in-State processor, and monitor                   donated foods and finished end                         letter of credit must be sufficient to
                                                    other processing activities under a                     products are properly credited to                      cover at least 75 percent of the value of
                                                    Recipient Agency Processing                             recipient agencies. Distributing agencies              donated foods in the processor’s
                                                    Agreement. All such activities must be                  can set additional requirements.                       physical or book inventory, as
                                                    performed in accordance with the                           (j) Duration of agreements. An                      determined annually and at the
                                                    requirements of this part. All Recipient                agreement between a distributing, or                   discretion of FNS for processors under


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                                                    1248                    Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules

                                                    National Processing Agreements. For                        (4) The quantity of end product                     efficiently. If necessary, the processor
                                                    multi-state processors in their first year              produced; and                                          must use commercially purchased food
                                                    of participation in the processing                         (5) The processing yield of donated                 of the same generic identity, of U.S.
                                                    program, the amount of the performance                  food, which may be expressed as the                    origin, and equal or better in all USDA
                                                    bond or letter of credit must be                        quantity (pounds or cases) of donated                  procurement specifications than the
                                                    sufficient to cover 100 percent of the                  food needed to produce a specific                      donated food to provide the number of
                                                    value of donated foods, as determined                   quantity of end product or as the                      cases required to meet the standard
                                                    annually, and at the discretion of FNS.                 percentage of raw donated food versus                  yield to the distributing or recipient
                                                    The surety company from which a bond                    the quantity returned in the finished                  agency, as appropriate. The standard
                                                    is obtained must be listed in the most                  end product.                                           yield must be indicated on the end
                                                    current Department of Treasury’s Listing                   (b) Processing yields of donated foods.             product data schedule.
                                                    of Approved Sureties (Department                        All end products must have a                              (c) Compensation for loss of donated
                                                    Circular 570).                                          processing yield of donated foods                      foods. The processor must compensate
                                                       (b) Calling in the performance bond or               associated with its production and this                the distributing or recipient agency, as
                                                    letter of credit. The distributing or                   processing yield must be indicated on                  appropriate, for the loss of donated
                                                    recipient agency must call in the                       its end product data schedule. The                     foods, or for the loss of commercially
                                                    performance bond or letter of credit                    processing yield options are limited to                purchased foods substituted for donated
                                                    whenever a processor’s lack of                          100 percent yield, guaranteed yield, and               foods. Such loss may occur, for
                                                    compliance with this part, or with the                  standard yield.                                        example, if the processor fails to meet
                                                                                                               (1) Under 100 percent yield, the                    the required processing yield of donated
                                                    terms of the In-State or Recipient
                                                                                                            processor must ensure that 100 percent                 food or fails to produce end products
                                                    Agency Processing Agreement, results
                                                                                                            of the raw donated food is returned in                 that meet required specifications, if
                                                    in a loss of donated foods to a
                                                                                                            the finished end product. The processor                donated foods are spoiled, damaged, or
                                                    distributing or recipient agency and the
                                                                                                            must replace any processing loss of                    otherwise adulterated at a processing
                                                    processor fails to make restitution or                  donated food with commercially
                                                    respond to a claim action initiated to                                                                         facility, or if end products are
                                                                                                            purchased food of the same generic                     improperly distributed. To compensate
                                                    recover the loss. Similarly, FNS will call              identity, of U.S. origin, and equal or
                                                    in the performance bond or letter of                                                                           for such loss, the processor must:
                                                                                                            better in all USDA procurement                            (1) Replace the lost donated food or
                                                    credit in the same circumstances, in                    specifications than the donated food.                  commercial substitute with
                                                    accordance with National Processing                     The processor must demonstrate such                    commercially purchased food of the
                                                    Agreements, and will ensure that any                    replacement by reporting reductions in                 same generic identity, of U.S. origin,
                                                    monies recovered are reimbursed to                      donated food inventories on                            and equal or better in all USDA
                                                    distributing agencies for losses of                     performance reports by the amount of                   procurement specifications than the
                                                    entitlement foods.                                      donated food contained in the finished                 donated food; or
                                                    § 250.33 Ensuring processing yields of                  end product rather than the amount that                   (2) Return end products that are
                                                    donated foods.                                          went into production. The Department                   wholesome but do not meet required
                                                                                                            may approve an exception if a processor                specifications to production for
                                                       (a) End product data schedules. The
                                                                                                            experiences a significant manufacturing                processing into the requisite quantity of
                                                    processor must submit an end product
                                                                                                            loss.                                                  end products that meet the required
                                                    data schedule, in a standard electronic                    (2) Under guaranteed yield, the                     specifications (commonly called rework
                                                    format dictated by FNS, for approval                    processor must ensure that a specific                  products); or
                                                    before it may process donated foods into                quantity of end product (i.e., number of                  (3) If the purchase of replacement
                                                    end products. For In-State Processing                   cases) will be produced from a specific                foods or the reprocessing of products
                                                    Agreements, the end product data                        quantity of donated food, as determined                that do not meet the required
                                                    schedule must be approved by the                        by the parties to the processing                       specifications is not feasible, the
                                                    distributing agency and, for products                   agreement, and, for In-State Processing                processor may, with FNS, distributing
                                                    containing donated red meat and                         Agreements, approved by the                            agency, or recipient agency approval,
                                                    poultry, the end product data schedule                  Department. If necessary, the processor                dependent on which entity maintains
                                                    must also be approved by the                            must use commercially purchased food                   the agreement with the processor, pay
                                                    Department. For National Processing                     of the same generic identity, of U.S.                  the distributing or recipient agency, as
                                                    Agreements, the end product data                        origin, and equal or better in all USDA                appropriate, for the replacement value
                                                    schedule must be approved by the                        procurement specifications than the                    of the donated food or commercial
                                                    Department. An end product data                         donated food to provide the guaranteed                 substitute.
                                                    schedule must be submitted, and                         number of cases of end product to the                     (d) Credit for sale of by-products. The
                                                    approved, for each new end product                      distributing or recipient agency, as                   processor must credit the distributing or
                                                    that a processor wishes to provide or for               appropriate. The guaranteed yield must                 recipient agency, as appropriate, for the
                                                    a previously approved end product in                    be indicated on the end product data                   sale of any by-products produced in the
                                                    which the ingredients (or other                         schedule.                                              processing of donated foods. The
                                                    pertinent information) have been                           (3) Under standard yield, the                       processor must credit for the net value
                                                    altered. On the end product data                        processor must ensure that a specific                  of such sale, or the market value of the
                                                    schedule, the processor must describe                   quantity of end product (i.e., number of               by-products, after subtraction of any
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                                                    its processing of donated food into an                  cases), as determined by the                           documented expenses incurred in
                                                    end product, including the following                    Department, will be produced from a                    preparing the by-product for sale.
                                                    information:                                            specific quantity of donated food. The                 Crediting must be achieved through
                                                       (1) A description of the end product;                established standard yield is higher than              invoice reduction or by another means
                                                       (2) The types and quantities of                      the yield the processor could achieve                  of crediting.
                                                    donated foods included;                                 under normal commercial production                        (e) Labeling requirements. The
                                                       (3) The types and quantities of other                and serves to reward those processors                  processor must ensure that all end
                                                    ingredients included;                                   that can process donated foods most                    product labels meet Federal labeling


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                                                                            Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules                                             1249

                                                    requirements. A processor that claims                   cost of acceptance service grading. The                have been backhauled from a recipient
                                                    end products fulfill meal pattern                       processor must maintain grading                        agency. However, such commingling
                                                    requirements in child nutrition                         certificates and other records necessary               must be performed in a manner that
                                                    programs must comply with the                           to document compliance with                            ensures the safe and efficient use of
                                                    procedures required for approval of                     requirements for substitution of donated               donated foods, as well as compliance
                                                    labels of such end products.                            foods and with other requirements of                   with substitution requirements in
                                                                                                            this subpart.                                          § 250.34 and with reporting of donated
                                                    § 250.34   Substitution of donated foods.                  (d) Waiver of grading requirements.                 food inventories on performance
                                                       (a) Substitution of commercially                     The distributing agency may waive the                  reports, as required in § 250.37. The
                                                    purchased foods for donated foods.                      grading requirement for donated beef,                  processor must also ensure that
                                                    Unless its agreement specifically                       pork or poultry in accordance with one                 commingling of processed end products
                                                    stipulates that the donated foods must                  of the conditions listed in this                       and other food products, either at its
                                                    be used in processing, the processor                    paragraph (d). However, grading may                    facility or at the facility of a commercial
                                                    may substitute commercially purchased                   only be waived on a case by case basis                 distributor, ensures the sale and
                                                    foods for donated foods that are                        (e.g., for a particular production run);               delivery of end products that meet the
                                                    delivered to it from a USDA vendor. The                 the distributing agency may not approve                processing requirements in this
                                                    commercially purchased food must be                     a blanket waiver of the requirement.                   subpart—e.g., by affixing the applicable
                                                    of the same generic identity, of U.S.                   Additionally, a waiver may only be                     USDA certification stamp to the exterior
                                                    origin, and equal or better in all USDA                 granted if a processor’s past                          shipping containers of such end
                                                    procurement specifications than the                     performance indicates that the quality of              products.
                                                    donated food. Commercially purchased                    the end product will not be adversely                     (d) Limitation on donated food
                                                    beef, pork, or poultry must meet the                    affected. The conditions for granting a                inventories. Inventories of donated food
                                                    same specifications as donated product,                 waiver include:                                        at processors may not be in excess of a
                                                    including inspection, grading, testing,                    (1) That even with ample notification               six-month supply, based on an average
                                                    and humane handling standards and                       time, the processor cannot secure the                  amount of donated foods utilized for
                                                    must be approved by the Department in                   services of a grader;                                  that period, unless a higher level has
                                                    advance of substitution. The processor                     (2) The cost of the grader’s service in             been specifically approved by the
                                                    may choose to make the substitution                     relation to the value of donated beef,                 distributing agency on the basis of a
                                                    before the actual receipt of the donated                pork or poultry being processed would                  written justification submitted by the
                                                    food. However, the processor assumes                    be excessive; or                                       processor. Distributing agencies are not
                                                    all risk and liability if, due to changing                 (3) The distributing or recipient                   permitted to submit food orders for
                                                    market conditions or other reasons, the                 agency’s urgent need for the product                   processors reporting no sales activity
                                                    Department’s purchase of donated foods                  leaves insufficient time to secure the                 during the prior year’s contract period
                                                    and their delivery to the processor is not              services of a grader.                                  unless documentation is submitted by
                                                    feasible. Commercially purchased food                      (e) Use of substituted donated foods.               the processor which outlines specific
                                                    substituted for donated food must meet                  The processor may use donated foods                    plans for donated food drawdown,
                                                    the same processing yield requirements                  that have been substituted with                        product promotion, or sales expansion.
                                                    in § 250.33 that would be required for                  commercially purchased foods in other                  When inventories are determined to be
                                                    the donated food.                                       processing activities conducted at its                 excessive for a State or processor, e.g.,
                                                       (b) Prohibition against substitution                 facilities.                                            more than six months or exceeding the
                                                    and other requirements for backhauled                                                                          established protection, FNS may require
                                                    donated foods. The processor may not                    § 250.35 Storage, food safety, quality                 the transfer of inventory and/or
                                                    substitute or commingle donated foods                   control, and inventory management.                     entitlement to another State or processor
                                                    that are backhauled to it from a                          (a) Storage and quality control. The                 to ensure utilization prior to the end of
                                                    distributing or recipient agency’s storage              processor must ensure the safe and                     the school year.
                                                    facility. The processor must process                    effective storage of donated foods,                       (e) Reconciliation of excess donated
                                                    backhauled donated foods into end                       including compliance with the general                  food inventories. If, at the end of the
                                                    products for sale and delivery to the                   storage requirements in § 250.12, and                  school year, the processor has donated
                                                    distributing or recipient agency that                   must maintain an effective quality                     food inventories in excess of a six-
                                                    provided them and not to any other                      control system at its processing                       month supply, the distributing agency
                                                    agency. Distributing or recipient                       facilities. The processor must maintain                may, in accordance with paragraph (d)
                                                    agencies must purchase end products                     documentation to verify the                            of this section, permit the processor to
                                                    utilizing donated foods backhauled to                   effectiveness of its quality control                   carry over such excess inventory into
                                                    their contracted processor. The                         system and must provide such                           the next year of its agreement, if it
                                                    processor may not provide payment for                   documentation upon request.                            determines that the processor may
                                                    backhauled donated foods in lieu of                        (b) Food safety requirements. The                   efficiently store and process such
                                                    processing.                                             processor must ensure that all                         quantity of donated foods. The
                                                       (c) Grading requirements. The                        processing of donated foods is                         distributing agency may also direct the
                                                    processing of donated beef, pork, and                   conducted in compliance with all                       processor to transfer such donated foods
                                                    poultry must occur under Federal                        Federal, State, and local requirements                 to other recipient agencies, or to transfer
                                                    acceptance service grading, which is                    relative to food safety.                               them to other distributing agencies, in
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                                                    conducted by the Department’s                              (c) Commingling of donated foods and                accordance with § 250.12(e). However, if
                                                    Agricultural Marketing Service. Federal                 commercially purchased foods. The                      these actions are not practical, the
                                                    acceptance service grading ensures that                 processor may commingle donated                        distributing agency must require the
                                                    processing is conducted in compliance                   foods and commercially purchased                       processor to pay it for the donated foods
                                                    with substitution and yield                             foods, unless the processing agreement                 held in excess of allowed levels at the
                                                    requirements and in conformance with                    specifically stipulates that the donated               replacement value of the donated foods.
                                                    the end product data schedule. The                      foods must be used in processing, and                     (f) Disposition of donated food
                                                    processor is responsible for paying the                 not substituted, or the donated foods                  inventories upon agreement


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                                                    1250                    Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules

                                                    termination. When an agreement                             (c) Direct discount. Under this system,             contract value of the donated foods, as
                                                    terminates, and is not extended or                      the processor must sell end products to                defined in § 250.2, must be used.
                                                    renewed, the processor must take one of                 the distributing or recipient agency, as                  (h) Ensuring sale and delivery of end
                                                    the actions indicated in this paragraph                 appropriate, at a net price that provides              products to eligible recipient agencies.
                                                    (f) with respect to remaining donated                   a discount from the commercial case                    In order to ensure the sale of end
                                                    food inventories, as directed by the                    price for the value of donated food                    products to eligible recipient agencies,
                                                    distributing agency or recipient agency,                contained in the end products.                         the distributing agency must provide the
                                                    as appropriate. The processor must pay                     (d) Indirect discount. Under this                   processor with a list of recipient
                                                    the cost of transporting any donated                    system, the processor delivers end                     agencies eligible to purchase end
                                                    foods when the agreement is terminated                  products to a commercial distributor,                  products, along with the quantity of raw
                                                    at the processor’s request or as a result               which must sell the end products to an                 donated food that is to be delivered to
                                                    of the processor’s failure to comply with               eligible distributing or recipient agency,             the processor for processing on behalf of
                                                    the requirements of this part. The                      as appropriate, at a net price that                    each recipient agency. In order to ensure
                                                    processor must:                                         provides a discount from the                           that the distributor sells end products
                                                       (1) Return the donated foods, or                     commercial case price for the value of                 only to eligible recipient agencies, the
                                                    commercially purchased foods that meet                  donated food contained in the end                      processor must provide the distributor
                                                    the substitution requirements in                        products. The processor must require                   with a list of eligible recipient agencies
                                                    § 250.34, to the distributing or recipient              the distributor to notify it of such sales,            and either:
                                                    agency, as appropriate; or                              at least on a monthly basis, through                      (1) The quantities of approved end
                                                                                                            automated sales reports or other                       products that each recipient agency is
                                                       (2) Transfer the donated foods, or
                                                                                                            electronic or written submission. The                  eligible to receive; or
                                                    commercially purchased foods that meet                                                                            (2) The quantity of donated food
                                                    the substitution requirements in                        processor then compensates the
                                                                                                                                                                   allocated to each recipient agency and
                                                    § 250.34, to another distributing or                    distributor for the discount provided for
                                                                                                                                                                   the raw donated food (pounds or cases)
                                                    recipient agency with which it has a                    the value of the donated food in its sale
                                                                                                                                                                   needed per case of each approved end
                                                    processing agreement; or                                of end products.
                                                                                                                                                                   product.
                                                       (3) If returning or transferring the                    (e) Fee-for-service. Under this system,
                                                    donated foods, or commercially                          the processor must sell end products to                § 250.37 Reports, records, and reviews of
                                                    purchased foods that meet the                           the distributing or recipient agency, as               processor performance.
                                                    substitution requirements in § 250.34, is               appropriate, at a fee-for-service, which                  (a) Performance reports. The
                                                    not feasible, the processor may, with                   includes all costs to produce the end                  processor must submit a performance
                                                    FNS approval, pay the distributing or                   products not including the value of the                report to the distributing agency (or to
                                                    recipient agency, as appropriate, for the               donated food used in production. The                   the recipient agency, in accordance with
                                                    donated foods, at the contract value or                 processor must identify any charge for                 a Recipient Agency Processing
                                                    replacement value of the donated foods,                 delivery of end products separately from               Agreement) on a monthly basis, which
                                                    whichever is higher.                                    the fee-for-service on its invoice. If the             must include the information listed in
                                                                                                            processor provides end products sold                   this paragraph (a). Performance reports
                                                    § 250.36 End product sales and crediting                under fee-for-service to a distributor for             must be submitted not later than 30
                                                    for the value of donated foods.                         delivery to the distributing or recipient              days after the end of the reporting
                                                      (a) Methods of end product sales. To                  agency, the processor must identify the                period; however, the final (June)
                                                    ensure that the distributing or recipient               distributor’s delivery charge separately               performance report must be submitted
                                                    agency, as appropriate, receives credit                 from the fee-for-service on its invoice to             within 60 days of the end of the
                                                    for the value of donated foods contained                the appropriate agency or may permit                   reporting period. The performance
                                                    in end products, the sale of end                        the distributor to bill the agency                     report must include the following
                                                    products must be performed using one                    separately for the delivery of end                     information for the reporting period,
                                                    of the systems of end product sales                     products. When the recipient agency                    with year-to-date totals:
                                                    described in this section. All systems of               procures storage and distribution of                      (1) A list of all recipient agencies
                                                    sales utilized must provide clear                       processed end products separately from                 purchasing end products;
                                                    documentation of crediting for the value                the processing of donated foods, the                      (2) The quantity of donated foods in
                                                    of the donated foods contained in the                   recipient agency may provide the                       inventory at the beginning of the
                                                    end products.                                           distributor written approval to act as the             reporting period;
                                                                                                            recipient agency’s authorized agent for                   (3) The quantity of donated foods
                                                      (b) Refund or rebate. Under this
                                                                                                            the total case price (i.e., including the              received;
                                                    system, the processor sells end products                                                                          (4) The quantity of donated foods
                                                    to the distributing or recipient agency,                fee-for-service and the delivery charge).
                                                                                                                                                                   transferred to the processor from
                                                    as appropriate, at the commercial, or                   The processor must require that the
                                                                                                                                                                   another entity, or transferred by the
                                                    gross, price and must provide a refund                  distributor notify it of such sales, at
                                                                                                                                                                   processor to another entity;
                                                    or rebate for the value of the donated                  least on a monthly basis, through                         (5) The quantity of donated foods
                                                    food contained in the end products. The                 automated sales reports, email, or other               losses;
                                                    processor may also deliver end products                 electronic or written submission.                         (6) The quantity of end products
                                                    to a commercial distributor for sale to                    (f) Approved alternative method. The                delivered to each eligible recipient
                                                    distributing or recipient agencies under                processor or distributor may sell end                  agency;
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                                                    this system. In both cases, the processor               products under an alternative method                      (7) The quantity of donated foods
                                                    must provide a refund to the                            approved by FNS and the distributing                   remaining at the end of the reporting
                                                    appropriate agency within 30 days of                    agency that ensures crediting for the                  period;
                                                    receiving a request for a refund from                   value of donated foods contained in the                   (8) A certification statement that
                                                    that agency. The refund request must be                 end products.                                          sufficient donated foods are in
                                                    in writing, which may be transmitted                       (g) Donated food value used in                      inventory or on order to account for the
                                                    via email or other electronic                           crediting. In crediting for the value of               quantities needed for production of end
                                                    submission.                                             donated foods in end product sales, the                products;


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                                                                            Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules                                                1251

                                                       (9) Grading certificates, as applicable;                (3) Production, sale, and delivery of                 (1) Receives donated food shipments;
                                                    and                                                     end products, including sales through                    (2) Delivers end products to eligible
                                                       (10) Other supporting documentation,                 distributors;                                          recipient agencies, in the types and
                                                    as required by the distributing agency or                  (4) All agreements with distributors;               quantities for which they are eligible;
                                                    recipient agency.                                          (5) Remittance of refunds, invoices, or               (3) Meets the required processing
                                                       (b) Reporting reductions in donated                  other records that assure crediting for                yields for donated foods; and
                                                    food inventories. The processor must                    donated foods in end products and for                    (4) Accurately reports donated food
                                                    report reductions in donated food                       sale of byproducts;                                    inventory activity and maintains
                                                    inventories on performance reports only                    (6) Documentation of Federal or State               inventories within approved levels.
                                                    after sales of end products have been                   inspection of processing facilities, as                § 250.38   Provisions of agreements.
                                                    made, or after sales of end products                    appropriate, and of the maintenance of
                                                                                                                                                                     (a) National Processing Agreement. A
                                                    through distributors have been                          an effective quality control system;
                                                                                                               (7) Documentation of substitution of                National Processing Agreement includes
                                                    documented. Documentation of                                                                                   provisions to ensure that a multi-State
                                                    distributor sales must be through the                   commercial foods for donated foods,
                                                                                                            including grading certificates, as                     processor complies with all of the
                                                    distributing or recipient agency’s                                                                             applicable requirements in this part
                                                    request for a refund (under a refund or                 applicable;
                                                                                                               (8) Waivers of grading requirements,                relating to the processing of donated
                                                    rebate system) or through receipt of the                                                                       foods.
                                                    distributor’s automated sales reports or                as applicable; and
                                                                                                               (9) Required reports.                                 (b) Required provisions for State
                                                    other electronic or written reports                                                                            Participation Agreement. A State
                                                    submitted to the processor (under an                       (e) Recordkeeping requirements for
                                                                                                            the distributing agency. The distributing              Participation Agreement with a multi-
                                                    indirect discount system or under a fee-                                                                       State processor must include the
                                                    for-service system).                                    agency must maintain the following
                                                                                                            records relating to the processing of                  following provisions:
                                                       (c) Summary performance report.                                                                               (1) Contact information for all
                                                    Along with the submission of                            donated foods:
                                                                                                               (1) In-State Processing Agreements                  appropriate parties to the agreement;
                                                    performance reports to the distributing                                                                          (2) The effective dates of the
                                                    agency, a multi-State processor must                    and State Participation Agreements;
                                                                                                                                                                   agreement;
                                                    submit a summary performance report                        (2) End product data schedules or                     (3) A list of recipient agencies eligible
                                                    to FNS, on a monthly basis and in a                     summary end product data schedules,                    to receive end products;
                                                    format established by FNS, in                           as applicable;                                           (4) Summary end product data
                                                                                                               (3) Performance reports;                            schedules, with end products that may
                                                    accordance with its National Processing
                                                                                                               (4) Grading certificates, as applicable;            be sold in the State;
                                                    Agreement. The summary report must
                                                                                                               (5) Documentation that supports                       (5) Assurance that the processor will
                                                    include an accounting of the processor’s
                                                                                                            information on the performance report,                 not substitute or commingle backhauled
                                                    national inventory of donated foods,
                                                                                                            as required by the distributing agency                 donated foods and will provide end
                                                    including the information listed in this
                                                                                                            (e.g., sales invoices or copies of refund              products processed from such donated
                                                    paragraph (c). The report must be
                                                                                                            payments);                                             foods only to the distributing or
                                                    submitted not later than 30 days after                     (6) Copies of audits of in-State
                                                    the end of the reporting period;                                                                               recipient agency from which the foods
                                                                                                            processors and documentation of the                    were received;
                                                    however, the final performance report                   correction of any deficiencies identified
                                                    must be submitted within 60 days of the                                                                          (6) Any applicable labeling
                                                                                                            in such audits;                                        requirements;
                                                    end of the reporting period. The                           (7) The receipt of end products, as
                                                    summary performance report must                                                                                  (7) Other processing requirements
                                                                                                            applicable; and                                        implemented by the distributing agency,
                                                    include the following information for                      (8) Procurement documents, as
                                                    the reporting period:                                                                                          such as the specific method(s) of end
                                                                                                            applicable.                                            product sales permitted;
                                                       (1) The total donated food inventory                    (f) Recordkeeping requirements for the
                                                    by State and the national total at the                                                                           (8) A statement that the agreement
                                                                                                            recipient agency. The recipient agency                 may be terminated by either party upon
                                                    beginning of the reporting period;                      must maintain the following records
                                                       (2) The total quantity of donated food                                                                      30 days’ written notice;
                                                                                                            relating to the processing of donated                    (9) A statement that the agreement
                                                    received by State, with year-to-date                    foods:                                                 may be terminated immediately if the
                                                    totals, and the national total of donated                  (1) The receipt of end products                     processor has not complied with its
                                                    food received;                                          purchased from processors or                           terms and conditions; and
                                                       (3) The total quantity of donated food               distributors;                                            (10) A statement requiring the
                                                    reduced from inventory by State, with                      (2) Crediting for the value of donated              processor to enter into an agreement
                                                    year-to-date totals, and the national total             foods contained in end products;                       with any and all distributors delivering
                                                    of donated foods reduced from                              (3) Recipient Agency Processing                     processed end products to recipient
                                                    inventory; and                                          Agreements, as applicable, and, in                     agencies that ensures adequate data
                                                       (4) The total quantity of donated foods              accordance with such agreements, other                 sharing, reporting, and crediting of
                                                    remaining in inventory by State, and the                records included in paragraph (e) of this              donated foods, in accordance with
                                                    national total, at the end of the reporting             section, if not retained by the                        § 250.30(i).
                                                    period.                                                 distributing agency; and                                 (c) Required provisions of the In-State
                                                       (d) Recordkeeping requirements for                      (4) Procurement documents, as
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                                                                                                                                                                   Processing Agreement. An In-State
                                                    processors. The processor must                          applicable.                                            Processing Agreement must include the
                                                    maintain the following records relating                    (g) Review requirements for the                     following provisions or attachments:
                                                    to the processing of donated foods:                     distributing agency. The distributing                    (1) Contact information for all
                                                       (1) End product data schedules and                   agency must review performance reports                 appropriate parties to the agreement;
                                                    summary end product data schedules,                     and other records that it must maintain,                 (2) The effective dates of the
                                                    as applicable;                                          in accordance with the requirements in                 agreement;
                                                       (2) Receipt of donated foods                         paragraph (e) of this section, to ensure                 (3) A list of recipient agencies eligible
                                                    shipments;                                              that the processor:                                    to receive end products, as applicable;


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                                                    1252                    Federal Register / Vol. 82, No. 3 / Thursday, January 5, 2017 / Proposed Rules

                                                       (4) In the event that subcontracting is                 (19) A statement that the distributing              This guidance material must be
                                                    allowed, the specific activities that will              agency, subdistributing agency, or                     provided to contracting agencies,
                                                    be performed under subcontracts;                        recipient agency, the Comptroller                      recipient agencies, and processors at the
                                                       (5) Assurance that the processor will                General, the Department of Agriculture,                time of the approval of the initial
                                                    provide a performance bond or                           or their duly authorized representatives,              agreement by the distributing agency,
                                                    irrevocable letter of credit to protect the             may perform on-site reviews of the                     when there have been regulatory or
                                                    value of donated foods it is expected to                processor’s operation to ensure that all               policy changes which necessitate
                                                    maintain in inventory, in accordance                    activities relating to donated foods are               changes in the guidance materials, and
                                                    with § 250.32;                                          performed in accordance with the                       upon request. The manual must include,
                                                       (6) End product data schedules for all               requirements in 7 CFR part 250;                        at a minimum, statements of the
                                                    end products, with all required                            (20) A statement that the agreement                 distributing agency’s policies and
                                                    information, in accordance with                         may be terminated by either party upon                 procedures regarding:
                                                    § 250.33(a);                                            30 days’ written notice;                                  (1) Contract approval;
                                                       (7) Assurance that the processor will                   (21) A statement that the agreement                    (2) Monitoring and review of
                                                    meet processing yields for donated                      may be terminated immediately if the                   processing activities;
                                                    foods, in accordance with § 250.33;                     processor has not complied with its                       (3) Recordkeeping and reporting
                                                       (8) Assurance that the processor will                terms and conditions;                                  requirements;
                                                    compensate the distributing or recipient                   (22) A statement that extensions or                    (4) Inventory controls; and
                                                    agency, as appropriate, for any loss of                 renewals of the agreement, if applicable,                 (5) Refund applications.
                                                                                                            are contingent upon the fulfillment of                    (c) Guidance or information.
                                                    donated foods, in accordance with
                                                                                                            all agreement provisions; and                          Guidance or information relating to the
                                                    § 250.33(c);
                                                                                                               (23) A statement requiring the                      processing of donated foods is included
                                                       (9) Any applicable labeling
                                                                                                            processor to enter into an agreement                   on the FNS Web site or may otherwise
                                                    requirements;
                                                                                                            with any and all distributors delivering               be obtained from FNS.
                                                       (10) Assurance that the processor will
                                                    meet requirements for the substitution                  processed end products to recipient                      Dated: December 23, 2016.
                                                    of commercially purchased foods for                     agencies that ensures adequate data                    Richard Lucas,
                                                    donated foods, including grading                        sharing, reporting, and crediting of                   Acting Administrator, Food and Nutrition
                                                    requirements, in accordance with                        donated foods, in accordance with                      Service.
                                                    § 250.34;                                               § 250.30(i).                                           [FR Doc. 2016–31561 Filed 1–4–17; 8:45 am]
                                                                                                               (d) Required provisions for Recipient
                                                       (11) Assurance that the processor will                                                                      BILLING CODE 3410–30–P
                                                                                                            Agency Processing Agreement. The
                                                    not substitute or commingle backhauled
                                                                                                            Recipient Agency Processing Agreement
                                                    donated foods and will provide end
                                                                                                            must contain the same provisions as an
                                                    products processed from such donated                                                                           DEPARTMENT OF TRANSPORTATION
                                                                                                            In-State Processing Agreement, to the
                                                    foods only to the recipient agency from
                                                                                                            extent that the distributing agency
                                                    which the foods were received, as                                                                              Federal Aviation Administration
                                                                                                            permits the recipient agency to perform
                                                    applicable;
                                                                                                            activities normally performed by the
                                                       (12) Assurance that the processor will                                                                      14 CFR Part 39
                                                                                                            distributing agency under an In-State
                                                    provide for the safe and effective storage
                                                                                                            Processing Agreement (e.g., approval of                [Docket No. FAA–2016–6928; Directorate
                                                    of donated foods, meet inspection                                                                              Identifier 2016–SW–018–AD]
                                                                                                            end product data schedules, review of
                                                    requirements, and maintain an effective
                                                                                                            performance reports, or management of                  RIN 2120–AA64
                                                    quality control system at its processing
                                                                                                            the performance bond). However, a list
                                                    facilities;
                                                                                                            of recipient agencies eligible to receive              Airworthiness Directives; Airbus
                                                       (13) Assurance that the processor will
                                                                                                            end products need not be included.                     Helicopters Deutschland GmbH
                                                    report donated food inventory activity                     (e) Noncompliance with processing                   Helicopters
                                                    and maintain inventories within                         requirements. If the processor has not
                                                    approved levels;                                        complied with processing requirements,                 AGENCY: Federal Aviation
                                                       (14) Assurance that the processor will               the distributing or recipient agency, as               Administration (FAA), DOT.
                                                    return, transfer, or pay for, donated food              appropriate, must not extend or renew                  ACTION: Notice of proposed rulemaking
                                                    inventories remaining upon termination                  the agreement and may immediately                      (NPRM).
                                                    of the agreement, in accordance with                    terminate it.
                                                    § 250.35(f);                                                                                                   SUMMARY:   We propose to adopt a new
                                                       (15) The specific method(s) of end                   § 250.39    Miscellaneous provisions.                  airworthiness directive (AD) for Airbus
                                                    product sales permitted, in accordance                    (a) Waiver of processing requirements.               Helicopters Deutschland GmbH
                                                    with § 250.36;                                          The Food and Nutrition Service may                     Helicopters (Airbus Helicopters) Model
                                                       (16) Assurance that the processor will               waive any of the requirements                          MBB–BK 117 C–2 and MBB–BK 117 D–
                                                    credit recipient agencies for the value of              contained in this part for the purpose of              2 helicopters. This proposed AD would
                                                    all donated foods, in accordance with                   conducting demonstration projects to                   require installing rivets to the air inlet
                                                    § 250.36;                                               test program changes designed to                       cover rings (rings). This proposed AD is
                                                       (17) Assurance that the processor will               improve the processing of donated                      prompted by reports of rings detaching.
                                                    submit performance reports and meet                     foods.                                                 The actions of this proposed AD are
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                                                    other reporting and recordkeeping                         (b) Processing activity guidance.                    intended to prevent the unsafe
                                                    requirements, in accordance with                        Distributing agencies must develop and                 condition on these products.
                                                    § 250.37;                                               provide a processing manual or similar                 DATES: We must receive comments on
                                                       (18) Assurance that the processor will               procedural material for guidance to                    this proposed AD by March 6, 2017.
                                                    obtain independent CPA audits and will                  contracting agencies, recipient agencies,              ADDRESSES: You may send comments by
                                                    correct any deficiencies identified in                  and processors. Distributing agencies                  any of the following methods:
                                                    such audits, in accordance with                         must revise these materials as necessary                 • Federal eRulemaking Docket: Go to
                                                    § 250.20;                                               to reflect policy and regulatory changes.              http://www.regulations.gov. Follow the


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Document Created: 2018-02-01 14:50:54
Document Modified: 2018-02-01 14:50:54
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionProposed Rules
ActionProposed rule.
DatesTo be assured of consideration, comments must be received on or before March 6, 2017.
ContactKiley Larson or Erica Antonson at the
FR Citation82 FR 1231 
RIN Number0584-AE38
CFR AssociatedAdministrative Practice and Procedure; Food Assistance Programs; Grant Programs; Social Programs; Reporting and Recordkeeping Requirements and Surplus Agricultural Commodities

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