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XI. PROCESSING

A processing agreement is a written document which authorizes a commercial food processor to convert USDA donated foods into more convenient forms. Such agreements assist school food authorities in maximizing donated foods, thereby contributing to the overall efficiency and effectiveness of their food service programs.

The concept of processing agreements is, that donated foods would be provided to a processor who would produce approved end-products which the school food authority could obtain at a price reduced by the full value of donated foods contained in a case of each end product.

Federal regulations permit state distribution agencies and/or school food authorities to enter into agreements with commercial companies to process any of the donated foods available. Since several school food authorities have similar needs, the state distribution agency usually enters into a single state agreement under which all school food authorities approved for the Food Dirstribution Progrtam may participate. This eliminates the need for multiple school food authorities to have identical agreements with the same processor for the same products. While any school food authority may have its own agreement, such documents must conform to all Federal and State requiremtns and must be approved by the state distribution agency prior to providing any donated foods to the processor.

A. Value Pass-Through Systems

There are three basic systems used to ensure school food authorities are provided the full value of donated foods contained in approved end-products. These systems are known as refund, discount, and fee-for-service. The refund and discount systems are generally used for Group B foods, whereas, fee-for-service is used for Group A foods.

A brief explanation of each system follows:

Refund - The school food authority purchases an approved end-product directly from the processor or from a distributor at the full (gross) agreed-upon price. The school food authority then applies for a refund for the value of donated food contained in the end-product as identified in the processing agreements. Refund applications must be submitted within 30 days from date of purchase for state distribution agency processing agreements. Date of purchase is considered to be the last day of the month in which purchase/delivery occurred.

Processors are required to make refunds promptly upon receipt of application. Funds received by school food authorities from the processors must be deposited in the school food service account. The cost of purchased food previously recorded should be reduced accordingly.

Discount - The school food authority purchases an approved end-product directly from the processor or from a distributor and is billed at a net price. The net price is determined by reducing the agreed-upon full (gross) price by an amount at least equal to the value of donated food contained in a case of approved end-product identified in the processing agreement. The billing procedure may be handled in two ways. First, the invoice would show the full price, the reduction for the value of donated food(s) and the net price.

Under the other procedure, the invoice would show only the net price provided a bid or other written document is on file which clearly; indicates that the net price shown reflects that the proper value of donated food was used to reduce the full price.

Fee-For-Service - This method is actually a net-price system since it reflects what the processor will charge, exclusive of the value of donated food, to produce an end-product containing donated food. End products obtained using this method are usually produced using USDA graders and/or inspectors who, as a minimum, certify that there was no diversion or substitution of the donated foods.

The school food authority shall not pay a fee for service in excess of the maximum identified in the processing agreement.

B. End-Products Available

The state distribution agency will provide to the school food authority at the beginning of the school year any relevant information concerning processing agreements approved by both the state distribution agency and USDA. The information will, at a minimum, include:

1. Name of processors

2. Description of the approved end-products and any identification codes.

3. Donated food(s) used in each end-product.

4. Refund or discount per case for each donated food or, where appropriate, the fee for service.

C. Value of Donated Food

The value of donated food contained in a case of end-product is determined by multiplying the quantity of each donated food by the established price per pound. This
per-case amount is identified in the processing agreement on the end-product data schedule (EPDS) for each approved item and provided to school food authorities on the approved NCDA&CS/USDA approved process listing.

D. Procurement Standards

When purchasing foods for use in food service programs, the school food authority must comply with Federal, State and local procurement standards. The primary purpose of these standards is to assure that open and free competition exists to the maximum extent possible. When the state distribution agency or USDA enters into an agreement with a company to process donated food(s), this does not remove responsibility of the school food authority to comply with the procurement standards. The processing agreement permits the company to receive donated foods to process into end-product, but it does not establish the price which the school food authority pays. The procurement procedures used by the school food authority should establish the price to be paid by the school food authority for all foods, including those end-products containing donated foods. The school food authority, as purchaser, has the responsibility to evaluate prices received and to determine the successful bidder.

Prices for approved end-products containing donated foods which will be purchased under the refund or discount systems should clearly state the full price (without donated foods), the value of donated foods, and the net price.

As part of the procurement activity, the school food authority should ensure that acquisition of an end-product containing donated food is cost-effective. Determining cost effectiveness is a simple process but extremely important in demonstrating good management, and ensuring maximum benefits are obtained from the resources expended.

To determine if purchasing a particular end-product containing donated foods is cost-effective, the school food authority should perform the following steps:

1. The value of donated food contained in the end-product should be added to the cash (net) price to arrive at the total cost of the item.

2. Gross (without value of donated food) prices for the same and comparable products being sold in the area should be obtained. (NOTE: Delivery charges and all other costs should be included.) Consideration should also be given to including the school food authority's cost to product the same item, if the school food authority actually has the capability for such production.

3. The total cost of the item being considered should be compared with the cost data obtained.

4. If the cost of the item (including the value of donated food) being considered is approximately the same as others, then it could be considered cost-effective. However, if the total cost (including the value of donated food) of the item being considered is significantly higher, then it is not cost-effective.

E. Child Nutrition Labels

The state distribution agency is requiring processors to obtain a child nutrition label for each end-product containing meat, poultry, fish or meat alternative such as cheese.

The child nutrition label must be affixed to each case of end-product. It is the responsibility of the school food authority to notify the state distribution agency before accepting any end-products containing meat, poultry, fish or meat alternate that do not have the child nutrition label affixed to the case.

For identification purposes, each end-product approved by the state distribution agency that requires a child nutrition label will have a number on it. This code will be shown on the list sent to the school food authority by; the state distribution agency. Either the child nutrition label number or the product identification code must be shown on the refund applications submitted by the school food authority.

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