DIRECT DIVERSION PROCESSING Detailed Training Session

1. DIRECT DIVERSION PROCESSINGDetailed Training Session Wednesday October 29, 2014 8:30 am to 12:00 pm Stevens Point Holiday Inn Hotel & Convention Center

2. What is Direct Diversion? • Processing Option for WI School Food Authorities (SFAs). • Bulk commodities (USDA Foods) committed by SFAs on annual order to chosen processors. For example: Raw bulk chicken into chicken nuggets Raw coarse ground beef in cooked beef patties Bulk orange juice into orange juice cups • Bulk USDA Foods are ordered by the DPI to be shipped directly from USDA to the processors. • Regardless of which processing option selected, brown box USDA Foods are available to all SFAs placing an annual order.

3. The Benefits • Increase participation More variety SFA-specific products Consistent product (USDA Foods & commercial) • Potential savings on storage costs

4. What Do I Have To Do?Where and How Do I Start?

5. THE STEPS • Processors • Products • Procurement • Annual Order • Agreements • Order End Products • Monitoring

6. PROCESSORS • Who are the eligible processors for Wisconsin? USDA approves multi-state processors on a national level. DPI uses the USDA approved list as a starting point for who is eligible to participate. Annually, all interested processors must complete an “Intent to Participate” form and return to the DPI. In the middle of October, a list of eligible processors for the following school year is posted on the DPI website.

7. Products • What products are available for your program? 1) Processors’ Summary End Product Data Schedules (SEPDS) 2) Annual Food Show

8. Summary End Product Data Schedule (SEPDS)

9. SEPDS A & B • SEPDS A is for all USDA Foods excluding Guaranteed Minimum Return. • Relevant columns: A, E, F, H and I • SEPDS B is for meat and poultry processed under Guaranteed Minimum Return. • Relevant columns: A, E, G, H

10. SEPDS • Please Note: The USDA Foods values are updated annually by USDA. The new USDA Foods values are released on November 15th for the following school year. Each processor must re-submit their SEPDS to USDA for approval after the release on November 15th. It takes some time for USDA to approve the SEPDS with the new prices. Therefore, the SEPDS may not be available for a few months after the release of the new prices. • The USDA Foods value for the bulk USDA Foods may increase or decrease. • Therefore, the amounts in Column H and Column I (on SEPDS A) may be slightly different for the upcoming year.

11. Products • How many approximate servings per product do you need? Determine approximate usage by: Servings per day x number of days on menu: (100 students x 45 days = 4,500 total servings needed)

12. USDA Foods SpecificProcurement Terminology • Once the general list of desired end products and approximate usage of each end product has been established, procurement must be conducted to determine processor specific list of end products. • Procurement for direct diversion processing includes USDA Foods specific language/terminology. Therefore, we will now review some of the common direct diversion processing terminology.

13. What is Value Pass-Through? Value pass through is the way in which SFAs receive the full value of USDA Food(s) contained in a further processed product. [Or, the entitlement value of the bulk product(s) contained in the end product.]

14. Value Pass-Through Options • Rebate to Recipient Agency (RA) • Fee for Service—Processor • Fee for Service—Distributor • Net Off Invoice (NOI)

15. Rebate • Processor or distributor sells end product directly to RA (SFA) and invoices SFA at gross price. SFA applies for rebate for value of USDA Foods contained in end product. Commercial price = Your price (SFA applies for a rebate monthly)

16. Rebate Example • SFA “X” purchases pizzas from distributor and pays gross price of $32 per case. Entitlement value per case of pizza purchased is $3.50. • SFA “X” files rebate to processor for the $3.50 entitlement value per case of product purchased. • SFA “X”’s actual net cost per case is $28.50 ($32 - $3.50).

17. Fee for Service—Processor • Processing fee charged by processor. • Processor invoices SFA for the cost of the non-USDA Foods ingredients and the processing fee. • Value of the USDA Foods has already been taken out of the price. Other ingredients + labor + packaging + overhead + other costs = Your Price

18. Fee for Service—Processor Example • Processor’s cost of non-USDA Foods ingredients, labor, packaging, overhead and other costs is $22 per case of pork taco filling. • The entitlement value per case of pork taco filling is $12. • The $22 processing fee takes into account that processor will use $12 worth of USDA Foods to make the taco filling. • SFA “X” will be invoiced by processor $22 per case of pork taco filling.

19. Fee for Service—Distributor • Distributor invoices SFA for the cost of the processed product and distributor handling/storage fees. • Price represents a processor’s cost of ingredients, labor, packaging, overhead and other costs incurred in the conversion of USDA Foods into an end product. • Value of USDA Foods has already been taken out of the price. Other ingredients + labor + packaging + overhead + other costs + distributor’s fees = Your Price

20. Fee for Service—Distributor Example • Processor’s cost of non-USDA Foods ingredients, labor, packaging, overhead and other costs is $22 per case of pork taco filling. • Distributor’s handling/storage fee is $3 per case of pork taco filling. • The entitlement value per case of pork taco filling is $12. • The $22 processing fee takes into account that processor will use $12 worth of USDA Foods to make the taco filling. • SFA “X” will be invoiced by distributor $25 per case of pork taco filling ($22 + $3).

21. Net Off Invoice (NOI) • Processor sells to a commercial distributor at gross price of end product. • Distributor invoices SFA at net case price. Invoice lists gross price, minus value of USDA Foods in case and then net case price. • Distributor claims a credit from processor for the value of USDA Foods contained in the end product. gross price - USDA Foods value = net case price

22. Net Off Invoice (NOI) Example • Processor sells case of chicken nuggets to distributor for $30 per case. • Distributor’s handling/storage fee is $3 per case of chicken nuggets. • The entitlement value per case of chicken nuggets is $10. • SFA “X” will be invoiced by distributor $23 per case of chicken nuggets ($30 + $3 - $10). • Distributor will claim a credit to the processor for the $10 entitlement value per case of chicken nuggets.

23. Why Do I Need to Know Value Pass Through Methods? • Not all processors do all methods. • During the procurement process, SFAs need to indicate in their procurement document which method(s) they are requesting pricing for. • For monitoring purposes, SFAs need to ensure they are receiving the full value of USDA Foods back.

24. Word Brain Teasers

25. What are Substitutable USDA Foods? • In USDA Foods processing, all bulk USDA Foods offered by USDA to distributing agencies fall into one of the following categories: 1) substitutable 2) non-substitutable

26. Substitutable USDA Foods • Full Substitution • Limited Substitution

27. Full Substitution • A processor can substitute commercial food for bulk USDA Foods without restriction, so long as the substitute food is of the same generic identity, equal or better quality, and of domestic origin. The exception to this is bulk beef, pork and poultry on a limited approval basis.

28. Full Substitution Example • Cheese Processor XYZ will be receiving two trucks of mozzarella cheese for Wisconsin’s direct diversion SFAs. • Cheese is fully substitutable. Therefore, Cheese Processor XYZ can use commercial bulk cheese to produce Wisconsin SFAs’ finished end products. • Benefit: SFA can receive finished end product regardless of whether bulk USDA Foods have arrived at processor’s warehouse.

29. Limited Substitution • The substitution of commercial product for bulk USDA Foods with some restrictions. This is applicable to poultry products. Processors must have a substitution plan approved by both FNS and AMS. Only bulk pack chicken, chicken parts, and bulk pack turkey delivered by USDA vendors to processors are eligible for substitution. • No backhauled poultry may be substituted.

30. Limited Substitution Example • Chicken Processor 123 will be receiving five trucks of bulk chicken for Wisconsin’s direct diversion SFAs. • Chicken Processor also processes bulk chicken for Ohio, Texas and Oklahoma. • Wisconsin’s trucks have not arrived at processor’s facility; however, processor has received some trucks for Ohio.

31. Limited Substitution Example (cont’d) • Processor uses an Ohio truck of bulk chicken to produce some of Wisconsin’s orders. Therefore, Wisconsin SFAs can receive finished end products prior to Wisconsin bulk chicken arriving at processor’s facility. • When Wisconsin’s truck of bulk chicken arrives, it is then used for Ohio’s processing.

32. Non-Substitutable Foods • USDA Foods that cannot be substituted with a commercially purchased product under the terms of a processing agreement. • Processor cannot produce finished end products until the Wisconsin bulk truck arrives at processor’s facility. • SFAs can not receive finished end products until processor receives bulk truck.

33. Why Do I Need to Know About Substitution Methods? • The type of substitution method utilized by your processor(s) will determine when you receive finished end products.

34. What is Yield? • The amount of finished end product returned for a defined amount of bulk raw USDA Foods sent to a processor.

35. Yield Methods • Guaranteed Minimum Return (GMR) • Standard Yield (SY) • Guaranteed Return (GR)

36. Guaranteed Minimum Return • The minimum weight or number of units of processed product that will be produced and returned for a set amount of USDA Foods provided. • This information is obtained from the processor’s summary end product data schedules.

37. Guaranteed Minimum Return Example • Turkey Processor H has completed SEPDS B and indicated in Column G “Estimated Cases of Finished Product Per Truckload” that 725 cases of sliced oven roasted turkey will be produced. This is Processor H’s guaranteed minimum return. • Processor H over yields and actually produces 800 cases from one truckload of bulk turkey. • Therefore, SFAs receiving this product from this bulk truck will all receive a fair share of the 75 cases over yield.

38. Standard Yield • A concept that fixes the number of finished cases that a SFA will receive from a fixed truckload of raw USDA Foods. • Standard yield will be higher than a processor could normally achieve in regular processing. • Standard yield requires the processor to add some commercial product to the USDA Foods. Therefore, products processed under standard yield will have a higher per case price.

39. Standard Yield Example • Chicken Processor 123 is processing chicken nuggets under standard yield. • Processor 123 has completed SEPDS A and Column F indicates 25 pounds USDA Foods inventory drawdown per case. • For every 25 pounds of bulk chicken committed, SFA receives one case of chicken nuggets. • There are no over yields or under yields.

40. Guaranteed Return • A red meat processing option • Specifies an exact number of finished cases that will be returned to the SFA from the processor.

41. Guaranteed Return Example • Beef Processor STR is processing beef patties under guaranteed return. • Processor STR has completed SEPDS A and Column F indicates 20 pounds USDA Foods inventory drawdown per case. • For every 20 pounds of bulk beef committed, SFA receives one case of beef patties. • There are no over yields or under yields.

42. Why Do I Need to Know Yield Methods? • SFAs need this information for evaluation of your procurement document(s). • SFAs need to know the various methods for monitoring, to ensure receipt of full USDA Foods values.

43. QUIZ • For every 36,000 lbs of bulk USDA chicken sent to “L & L Chicken”, 1,000 cases of product code 900539, grilled chicken patties will be returned. This is an example of : • Guaranteed Minimum Return • Non-guaranteed Return • Standard Yield • None of the above

44. QUIZ • Happy Cluck High School orders and receives 3 cases of “L & L Chicken” product code 900539, grilled chicken patties from their commercial distributor. The commercial distributor originally purchased this product from “L & L Chicken” for $49.00/case. • The entitlement value/case for product code 900539 is $20.00. • Per the distributor contract with Happy Cluck High School, the distributor charges $2/case for delivery. • The distributor invoices Happy Cluck High School $93 for the 3 cases of 900539, grilled chicken patties. ($49-$20 +$2) X 3

45. QUIZ This is an example of : • Net Off Invoice • Rebate • Standard Yield • Fee For Service Processor

46. QUIZ • “L & L Chicken” has a State Participation Agreement (SPA) in place with Wisconsin, Ohio and Texas. • “L & L Chicken” receives 3 trucks of bulk USDA chicken for the state of Ohio, but has not yet received any USDA bulk chicken for the state of Wisconsin. • Wisconsin has pending orders for product code 900539, grilled chicken patties. “L & L” Chicken” uses one truck of bulk USDA chicken received for the state of Ohio to produce product code 900539, grilled chicken patties for the state of Wisconsin.

47. QUIZ This is an example of : • Net Off Invoice • Limited Substitution • Full Substitution • Non-substitutable

48. PROCUREMENT • Once the desired products have been determined, participating SFAs must conduct proper procurement to determine which eligible processors will be utilized. • Randy Jones, DPI Procurement Specialist, will be covering the procurement process later in the presentation.

49. PROCUREMENT • Once the SFA has determined the participating processors through the SFA’s procurement process, SFA needs to make bulk pound commitments for each selected processor.

50. Word Brain Teasers