“ Smart Processing” A Presentation and Discussion on Further Processing of USDA Donated Foods Cliff Meyers, C.P.M CVS Se

1. “Smart Processing” A Presentation and Discussion on Further Processing of USDA Donated Foods Cliff Meyers, C.P.M CVS Services, Inc. 11 North Washington Street Suite 510 Rockville, MD 20850 301-251-5515 cmeyers@cvs-services.com

2. Presentation Topics “Smart Processing” History of USDA Program Code of Federal Regulations - 7CFR250 - Processing Agreements Processing Concepts: - Menu Writing - Yield - Value Pass Through Methods - Refund, Fee For Service, Indirect Sales Summary: What do I do now?

3. The Great Depression History of Donated Food Program Supply Outpaced Demand for Products Foraging for food in a city dump in Dubuque, Iowa where produce houses dumped apples, grapefruit, and other produce. April 1940 Destitute peapickers in California; a 32 year old mother of seven children. February 1936

4. Public Law 72-320, Section 32 1935 Federal response to the Great Depression in production agriculture 30% of import customs duty collections are diverted to the Department of Agriculture October 1 of each fiscal year Purpose is to support domestic origin agricultural commodities Estimated value between $5 billion and $6 billion unappropriated funds. History of Donated Food Program Legislation Introduced

5. Support for School Lunch Programs before 1946 History of Donated Food Program What Do You Notice About the Picture? Five cent hot lunches are served at the Woodville Public School in Greene County, GA. 1941 WPA propaganda poster supporting school lunch programs. 1944

6. History of Donated Food Program First Formal Appropriations for School Lunch 1946 National School Lunch Act • Signed by President Truman on June 4, 1946 • Response to the number of men enlisting for service during World War II that had nutrition-related problems which kept them from serving in the military • An entitlement program that could serve 54 million eligible 5 to 18-year-olds • ’03 - ’04 School Year USDA reimbursed at 27 million meals per day • USDA also made available $1-2 billion in a variety of domestic commodity foods • President Bush recently signed the re-authorization of the 1946 Act for five years.

7. Donated Foods Must be of American Origin • USDA currently purchasing 145 items with total sku’s around 550. • Purchases are made according to requests from Recipient Agencies and current market conditions. • Food and Nutrition Service makes foods available according to fair share basis to all States. • Most States make donated foods available to eligible Recipient Agencies on a fair share basis. • States monitor Average Daily Participation to determine fair share. (ADPX$.1725XOpen Days= Entitlement). • Ex: 1000 ADPX$.1725X180 Days = $31,050 Commodity Entitlement

8. Original Option Requires lots of labor and substantial inventory management Uncertain Delivery Schedules are Challenging

9. Traditional Processing Option #2 • Truck in truck out • High storage costs • Unknown delivery dates • Menu uncertainty • Increased commercial purchases

10. TITLE 7--Sec. 250.30 State processing of donated foods. (a) General. This section sets forth the terms and conditions under which distributing agencies, subdistributing agencies, or recipient agencies may enter into contracts for the processing of donated foods and prescribes the minimum requirements to be included in such contracts. Also can be viewed on: www.FNS.USDA.GOV/FDD. Select “State Processing”. Code of Federal Regulations Govern Processing and Carry Weight of Law

11. Processing Concepts Is Processing Growing or Declining in Popularity? Ten Year TrendAnalysis Percentage of USDA Purchases Further Processed

12. Processing Concepts Is Processing Growing or Declining in Popularity?

13. Processing Concepts Processing is Growing! • Processing popularity has increased in part due to: • Improvements in the functionality of the program made by • Federal and State administrators • Continued tightening of Labor market. Convenient products • are a necessity. • Food safety concerns are reduced when produced under • manufacturer controlled conditions. • Sophistication of the customer. The customer wants what • is available in quick serve restaurants. Manufacturers will • comply using commodity ingredients. • - Greater awareness of the total cost of ownership!

14. Processing Concepts Processing is Growing! • Total cost of ownership includes but is not limited to: • Cost of preparation time, benefits. • Cost impact of not following recipes. • Need for skilled or semi skilled labor. • Impact of lack of consistency on customer acceptance. • - Storage Cost

15. Processing Concepts Smart Processing Involves Three Important Aspects • Menu Development • - Write a highly acceptable menu • - Commodities should support the menu • - Commodities should be viewed as financial • assets, not physical food • - Ask yourself, would I have purchased this • processed product if I had to pay full price for it? • - Processing only represents a savings if students • accept the product. • - Make commodities work for you!

16. 2. Yield Analysis Yield refers to the amount of returned finished product derived from the original USDA raw material purchase. There are primarily three Categories of yields: Standard Yield – USDA works with industry to establish a higher yield than traditional manufacturing practices achieve. - This requires manufacturers to supplement production with minimal amounts of commercial inventory to achieve yield. - Standard Yield is used where it is common to lose large quantities of raw material during further processing. Also used where USDA is buying close to point of raw material origin as possible. Processing Concepts Smart Processing Involves Three Important Aspects

17. -Manufacturers have greater returns to customers at minimal added internal cost. - Schools benefit by reducing the amount of commercial, full price product purchased to fulfill menu needs. - USDA passes on larger benefit to recipient agencies. - Participation in a standard yield program is voluntary, but available to all processors. Examples include: Chicken – due to bones Fries - due to water loss Processing Concepts Smart Processing Involves Three Important Aspects

18. Guaranteed Minimum Return – manufacturers work through State processing agreements to guarantee a minimum amount of finished returned product. - The finished case yield becomes variable with each production run. In this scenario, the manufacturer must assign overruns and make up shortfalls. Shortfalls can be made up with a check, although you cannot serve a check. - Competitive pressures between processors improves returns. - GMR is commonly found in meat and poultry processing where manufacturing practices create varied yields. Processing Concepts Smart Processing Involves Three Important Aspects

19. 100%Return Yield – Some raw materials purchased by USDA are in a form that lend themselves to be further processed with minimal production loss. When you divert 100 lbs, you receive 100 pounds back. Summary on Yield: Yield should be calculated on total portions returned. Then calculate your full year’s need for that product. You may find that your overall costs are lower per category, even though you might pay slightly higher processing costs. DO NOT DECIDE ON PRICE ALONE! Processing Concepts Smart Processing Involves Three Important Aspects

23. Processing Concepts Smart Processing 3. – Pass Through Value Current Federal Regulations provide for a number of different methods for USDA commodity “Value to Pass Through” processed Commodities to eligible Recipient Agencies. Not all methods are approved in all States. Four Primary methods are: Fee For Service: The RA is invoiced directly by the manufacturer for the product minus the value of the raw ingredient contained within the finished goods. Pros: Ability to receive product not traditionally commercially distributed. Cons: Manufacturer expense of invoices, cash flow is poor, possible storage costs.

24. Processing Concepts Smart Processing Refund: The RA purchases eligible product from commercial distribution and applies to the processor for a refund equal to the amount of raw ingredient contained within the product. Pros: ability to purchase from commercial distributors in quantities of the schools choosing. Cons: Districts must remember to file for the refunds. Manufacturer has the expense and burden of writing vast numbers of refunds, adds cost to the product.

25. Processing Concepts Smart Processing Net Off Invoice: The RA purchases eligible product from commercial distribution and receives a discount off invoice equal to the amount of raw ingredient contained within the product. Pros: Use of commercial distribution, delivery on demand, less invoices, no storage costs, RA receives value up front. Cons: Not available in all States, distributors. Program is new. Note: Sales Verification is required for NOI. RA’s must take responsibility for managing their accounts.

26. Processing Concepts Smart Processing Direct Discount: The RA purchases eligible product directly from the processor. Pros: No storage costs, RA receives value up front. Cons: Schools must be of sufficient size to take advantage of direct delivery

27. Pass-Though Value Options: Fee For Service

28. Pass-Though Value Options: Electronic Rebate

29. Pass-Though Value Options: Indirect Sales Discount/Net Off Invoice

30. Pass-Though Value Options: Indirect Sales Discount/Net Off Invoice USDA and States Recognize Need For Change: These states initiated the Net-Off Invoice option school year 2004-2005 with commercial distributors

32. What Do I Do Now? First, take a deep breath! Participate – Get Involved- - Learn the options for processing in your State - Ask questions: - Does the State offer a web site where you can learn more about the program? - Is there a commodity food show? When? - What distribution methods are approved? - What Pass Through Methods are approved? Develop a winning menu! – - Ask yourself; How can commodities support my menu?

33. What Do I Do Now? First, take a deep breath! • Process Commodities: • - Focus on center of the plate and high volume • items for the largest benefits. • - Understand your entitlement, allocation and • balance and manage these throughout the school • year. • - Understand State deadlines and procedures for • submitting processing requests.

34. What Do I Do Now? First, take a deep breath! • Challenge yourself to view commodities as dollars, not physical products. • Understand your full year’s category needs when considering processing. Ask yourself: • EX: How many portions of chicken nuggets do I • need this school year? • What is the best way to use commodity processing • to minimize the amount of full price commercial • supplemental product I need to purchase?

35. What Do I Do Now? First, take a deep breath! • - Your goal is to maximize the “Return On • Investment” of your entitlement dollars. • - Set goals. Be realistic! • - You will not achieve maximization of entitlement • dollars in one year! • - Getting started is the hardest part! • - Good Luck!

36. Questions?