National School Lunch Program Diversion (Processing)

Does processing provide my school with the best value? 

Processing USDA Foods can represent cost savings, but it is not always the best option. The true value of processing USDA Foods = Value of USDA donated food + state charges + processing costs + storage and handling fees. Several factors should be analyzed before proceeding with processing USDA Foods:

• Does the processed USDA Food have a commercial equivalent?
  • A commercial equivalent will guarantee consistency on your menu.
• Can you afford the commercial equivalent if you run out of USDA Foods?
• What is the cost of processing the USDA Foods?
• What are the state charges, if any, for USDA Foods?
• What is the handling fee you pay your Distributor?
• What are your storage fees and how many months will your product be in storage?

The USDA Foods Cost Analysis Tool can assist school districts with analyzing the cost and value of processing and annual forecasting.

In the end, you need to determine the best use of your Planned Assistance Level (PAL):

1. Direct delivery USDA Foods (brown box), and/or;
2. USDA Foods diverted to a Further Processor of your choosing.

Like all other purchasing decisions, the use of your commodity entitlement must be in the best interest of your students and your program.

Terms you should know

What is NOI?

• Net off Invoice (NOI): A Value Pass-Through System. Processors sell finished product to Distributors at commercial price. Distributor sells end product to RA at price minus the value of the USDA Foods products used. Distributor submits documentation to Processor that product was sold and receives a credit from processor. Verification of sales from RAs is required.

What is Fee for Service?

• Fee-For-Service (FFS): A Value Pass-Through System which separates the value of donated USDA Foods from the other costs of production. The FFS price represents a Processor’s costs of ingredients (other than USDA Foods), labor, packaging, overhead, and other costs incurred in the conversion of the USDA Foods into the specified end product. Fee-for-service is an alternative to using a standard Value Pass-Through system. It has traditionally been used when processing meat and poultry products or other non-substitutable USDA Foods.

What is rebate?

• Rebate: A Value Pass-Through System where the RA pays the commercial price for processed items and then submits a request for rebate for the value of donated food used. A Value Pass-Through system by which a Recipient Agency purchases a Processor’s end products at the commercial price and receives from the processor, by means of a refund application, a payment equivalent to the value of the USDA Foods contained in the end products. See the definition of Refund Application and Indirect Refund Sale.

For questions concerning processing please email: [email protected]

August

• New Schools Year Begins
• Schools that need to make a change to their diversion (ordered the previous spring) will need to complete and submit a Direct Diversion Change Request Form to OGS Food Distribution.
• Schools should log onto the K12 and ProcessorLink websites to ensure that their distributor is set up correctly.

September

• Schools should start thinking about the procurement process for next years processed items.
• Double check the K12 and ProcessorLink websites to ensure that pounds are being drawn down correctly.
• Schools should be using 10% or more of pounds for each product each month.

October

• Attend the NYSNA Conference. Processors showcase their new and existing products during these events. It is a great time to sample items and consider your menu needs for the upcoming school year.
  • Receive Training
  • Network
  • Try out new products
• Double check the K12 and ProcessorLink websites to ensure that pounds are being drawn down correctly.
• Schools should be using 10% or more of pounds for each product each month.

November

• Double check the K12 and ProcessorLink websites to ensure that pounds are being drawn down correctly.
• Schools should be using 10% or more of pounds for each product each month.

December

• Attend a NYSNA Regional Industry Seminar. Processors showcase their new and existing products during these events. It is a great time to sample items and consider your menu needs for the upcoming school year.
  • Receive Training
  • Network
  • Try out new products
• In December, an email will be sent to schools alerting them that they will need to be at 40% usage of processed pounds by the end of January unless they provide information that they will be able to use all pounds by June 30th. Any schools not showing the 40% usage will be brought to that percentage of usage at this time.
• Procurement of Processors for the following school year should be taking place or very soon to be taking place.
• Double check the K12 and ProcessorLink websites to ensure that pounds are being drawn down correctly.

January

• The ordering process for USDA Foods begins. OGS will be sending emails regarding the Food Preference Survey and Fresh Fruit and Vegetable set asides. It is important to start thinking about how much USDA Foods entitlement your school wants to set aside for Direct Delivery (Brown Box), Fresh Fruit and Vegetable Programs and Diversion.
• Procurement of you Processor(s) for the following school year should be wrapping up.
• At the end of January any schools not at 40% usage will be brought to 40% and the excess pounds will be swept into the state account.
• Double check the K12 and ProcessorLink websites to ensure that pounds are being drawn down correctly.

February

• Procurement of Processor(s) for the following school year should be complete.
• Ordering of USDA Foods for the next school year begins.
• OGS Food Distribution will send out an email containing the Diversion Worksheet for schools to complete. This worksheet will help schools calculate the number of pounds needed to order bulk USDA Foods for processing.
• The worksheet contains four (4) tabs:
  • Diversion Worksheet: Lists all the processors and their end products. Simply enter the total number of cases for each item you need for the upcoming school year. The sheet will calculate pounds and estimated entitlement value.
  • Totals: This tab totals all the pounds by material/processor so you have an easy view of what to order. Once you have completed your work, you will need to print a copy and use this data for entering your orders into WBSCM. You will need the Business Partner ID listed in this tab when selecting your “deliver to” destination in WBSCM.
  • Contact Info: Contact information along with shipping requirements are available in this tab.
  • Reminders: Some important points to remember when entering your data into WBSCM.

• Important: The Diversion Worksheet is a tool to help simplify the calculation process. If you do not enter your orders directly into WBSCM then you will NOT receive the end product.

  Please remember the following as you complete this part of the diversion process:

  • The entitlement listed is an ESTIMATE based on actual meal counts from two years previous. Entitlement will be updated in August/September based on the actual reimbursable lunches served in the previous school year. You should have an idea at this point if your entitlement will be less or more and order accordingly.
  • Schools need to adjust their diversion ordering at the beginning of next school year if the difference between actual and estimated entitlement is excessive.
  • We reserve the right to modify or cancel your diversion if you have demonstrated that you have not used past diversion pounds.
  • NYS OGS does not properly procure any further processed items. All further end products you receive using USDA materials must go through your normal procurement process.
  • NYS OGS is tied to the dates that orders have to be submitted to USDA. If you fail to enter your orders in the timeframe outlined, we will be unable to accommodate your needs in the upcoming school year. Please make sure that if any vacation/school breaks fall within this timeframe, you take that into consideration for entering your information into WBSCM
  • Per federal regulations 7 CFR 250.31, 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 § 250.36; (see below)

      (3) The value of the donated food in the end products; and 

      (4) The location for the delivery of the end products. 

      7 CFR 250.36:  End product sales and crediting for the value of donated foods.

      § 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 methods of end product sales, also known as value pass through systems, 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 incorporates a discount from the commercial case price for the value of donated food contained in the end products.

      (d) Indirect discount. Under this system, also known as net off invoice, 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 incorporates 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. Recipient agencies should closely monitor invoices to ensure correct discounts are applied.

      (e) Fee-for-service.

      (1) 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. Three basic types of fee-for-service are used:

      (i) Direct shipment and invoicing from the processor to the recipient agency;

      (ii) Fee-for-service through a distributor, where the processor ships multiple pallets of product to a distributor with a breakout of who owns what products; and

      (iii) What is commonly known as Modified Fee-for-service, when the recipient agency has an authorized agent bill them for the total case price.

      (2) 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. 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. 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), in accordance with § 250.11(e).

      (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 § 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.

• WBSCM catalog will open for ordering of USDA Foods bulk pounds to processors. The catalog will be open for approximately three weeks. At the end of this timeframe, the WBSCM catalog will be closed. OGS Food Distribution will then analyze the orders placed and determine if a full truckload quantity of each item ordered has been met. Orders for products that do not meet the full truckload requirement will be declined.
• The WBSCM catalog will reopen for approximately one week. This timeframe is a second opportunity for schools to order USDA products that have already made the full truckload minimum requirement.
• Once all orders are placed, OGS Food Distribution will compile all the necessary data and send this information to processors. Processors will then know the amount of bulk product that will be sent to them for the following school year.

March through June

• Schools will need to reach out to their processors to receive a delivery schedule for all processed items for the upcoming school year.
• Double check the K12 and ProcessorLink websites to ensure that pounds are being drawn down correctly.
• Schools should be using 10% or more of pounds for each product each month.
• At the end of the June any unused pounds will be swept from school’s accounts, as all USDA food is supposed to be used in the year that it is purchased.

Previous School Year Information

How to track diverted foods 

Recipient agencies should monitor the balances of their pounds at the processors at least once a month. You should be using about 10% per month. There are two websites to monitor and track balances with processors and recipient agencies should sign up for both: K12 Food Service and Processor Link. You will need to log in to the correct website to see your remaining balance or what you have used, based on the processor.