Commodity Processing

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Commodity Processing

• To processor not to process?

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Then and Now
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School Year 2006-2007
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Assess Your Needs

• What does your organization need from the
  commodity program?
• What about your neighbors?
• What are your menu needs?
• Education and program guidance?

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Evaluate Your Operation

• Financial Health
• Are you in the red or in the black?
• What are your financial operational goals?
• How do you assess commodity value?
• Is commodity value a part of food cost or held
  out?
• Operations
• What sort of kitchen operations do you run?
• How do you factor in food safety?
• Are rising labor costs a concern?

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Evaluate State Commodity Model

• What methods does your State
  use to distribute commodities?
• What are the distribution fees?
• How does the State assess your needs?
• What are the limitations on processing?
• Does your State have administrative fees
  associated with processing?
• What are your distribution channels?

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Be Involved

• Build a relationship and work with the
  State DA provide feedback
• Build Co-ops and create purchasing blocks amongst
  RAs in your area
• Network with other States keep up on trends
• Understand State operating constraints
• Understand the Federal regulations
• Use your State DA, State SNA Assoc., ACDA, and
  USDA as a support resource

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Advantages to Processing

• Spread your commodity dollars further throughout
  the year
• Plan for commodities, dont react to them
• Get the products when and how you want them
• Utilize VPT methods to realize your commodity
  value quickly
• Product consistency, recognizable flavor profiles
• Brand recognition for your customers
• Food Safety HACCP

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• Brown Box Potatoes
• 12 State distribution Fee
• Box is 30 finished weight
• Box comes limited times per year
• Have to store all cases up front or arrange for
  storage
• When you run out, you have to find a commercial
  substitute
• Switching out products midstream customer
  dissatisfaction

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• Processed Potatoes
• 6 per pound
• 55 of raw goods to make a finished 30 case
• 12 commodity value buys you 200 of raw goods
  3.63 cases of finished goods
• Get the product you want, when you want it and in
  exact quantities needed
• Use your commercial distributor
• VPT of commodity value reduces commercial price
• Commercial product available when your run out of
  commodity inventory
• menu consistency customer satisfaction

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Commodities A grocery store model

• Box of Cereal off sale 4.00
• buying groceries with no bid
• Same box of Cereal on sale 3.00
• buying groceries with a bid
• Coupon from the Sunday paper 1.00 off
• subtracting out the commodity value
• In-store double coupon .50 off
• negotiating deals for freight and distribution
• Final cost of box of Cereal after all deals
  1.50

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Processing Agreements

• Multi-State Processors
• 1) National Processing Agreement (NPA)
• In-State Processors
• 2) State Master Agreements
• 3) State Agreements
• 4) Recipient Agency Agreement

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Yield Return

• Fixed
• 100 Yield
• Standard Yield (SY)
• Guaranteed Return (GR or GRO)
• SEPDS A

• Variable
• Guaranteed Minimum Return (GMR)
• SEPDS B

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100 Yield

• Concept
• Processor must return 100 of the DF received
  back to contracting agency in the form of
  finished end products
• Processor must add equivalent commercially
  purchased food to make up the manufacturing loss
• Advantages
• Easiest of methods
• Fixed inventory drawdown

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Guaranteed Return

• Concept
• Processor guarantees a fixed number of cases will
  be produced using a fixed amount of meat
• Guaranteed (average) yield fixed draw down
• Advantages
• AMS certification monitoring of National MPR
• No grading certificates
• No minimum to verify

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Standard Yield

• Concept
• Processor guarantees a fixed number of cases will
  be produced using a fixed amount of commodity
• Best for foods with high manufacturing losses
• Advantages
• No variation in delivery units
• Productions variables eliminated or replaced with
  fixed values
• Guaranteed cases and draw down per case

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Guaranteed Minimum Return

• Concept
• Minimum amount of finished end product to be
  returned based on the amount of raw DF supplied
  to the processor
• Traditionally red meat poultry
• Advantages
• Poultry wing credits buybacks
• Over yield

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Commodity Value

• November 15 Commodity File
• Cheese is 33 month average
• Used to determine
• Refunds or discounts
• Value of surety bond, escrow or LOC
• Costs of replacement for production or commodity
  losses
• Failure to meet GMR

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• Value-Pass-Through
• Fee-for-Service

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Types of Sale

• Direct
• Sales made directly from the processor to the DA
  or RA

• Indirect
• Sales are made from the processor to a commercial
  distributor

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Refund Sales

• Direct Refund
• Processor invoices RA at gross commercial price
• RA applies for a refund

• Indirect Refund Sale
• Processor sells commercial to distributor
• Distributor sells commercial to RA
• RA applies for refund

Inventory is reduced when processor pays the
refund
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Discount Sales

• Direct Discount
• Processor bills RA net price
• Inventory reduced when RA billed

• Indirect Discount
• Hybrid
• Processor sells commercial to distributor, who
  sells net to RA
• Distributor applies for refund from processor
• Inventory reduced when refund is paid

Requires Sales Verification
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Discount Sales

• Indirect Discount Through a Distributor
• Net Off Invoice or NOI
• Nationally approved VPT system
• Allows the distributors velocity report to serve
  as the refund application
• Requires identical commodity commercial end
  products
• Inventory reduced when processor receives
  velocity report
• Requires sales verification

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Net Off Invoice

• STATE DETERMINES WHAT METHODS OF VPT WILL BE USED
  IN THE STATE
• Is NOI good for the State?
• Is NOI good for recipients?

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NOI Considerations?

• Impact on State warehousing?
• Will delivery costs for non-processed commodities
  increase?
• What amendments need to be made to the processing
  agreement, warehousing contract, or procurement
  documents?
• What training/guidance does the State need to
  make available to RAs?
• How do you compare NOI with other VPT systems in
  procurement?

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NOI Considerations

• Are local distributors automated?
• Are local distributors interested in doing NOI?
• Should this be the only VPT system allowed for
  the processor?
• Will the State delegate sales verification to the
  processor as allowed by 250.19(b)(2)(vi)?
• How will the State do the 10 re-verification of
  reported sales?

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FEE FOR SERVICE

• This is the price per case a processor charges to
  convert raw commodities into a finished product.
  
• The fee could be
• FOB Plant
• FOB Destination
• Delivered
• Inventory reduction occurs upon billing RA or DA

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Inventory Controls

• State monitors processor inventory
• Processors should only be drawing down what they
  can prove was produced delivered
• Six month inventory limit
• No further distribution with excessive inventories

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Excess Inventory

• Common Causes
• Carryover inventory
• Deliveries late in the school year
• States failing to monitor flow
• Schools diverting commodity to a processor then
  failing to use inventory
• Schools failing to apply for rebates in a timely
  manner or not at all

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Excess Inventory

• What to do?
• Give processor written permission to maintain
  excess inventory
• Transfer to another school
• Transfer to another processor
• Transfer to DA that can use inventory
• Rare instances processor can buy down excess
  inventory

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School Allocation Controls

• Best guess for initial diversion
• Request destination changes
• Paper transfer between processors
• Track processors and balances
• Understand State policies
• Carryover inventory
• Order changes and transfers
• Develop a strategy
• Front-loading late delivery for use early in the
  next SY
• Banking used over the course of 1-2 school
  years

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Negative Inventory

• Often due to food order delays
• State and processor work to resolve problem
• Can offset negative inventory upon receipt of
  donated food
• Should be avoided
• Processor stop selling at discounted
• Processors own risk, no guarantee of replacement

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To Process or Not To Process?

• Assess your needs
• Evaluate your operation
• Financial Health
• Operations
• Evaluate State Commodity Model

• BE INVOLVED