USDA Foods Inventory Protection Requirements

This Management Bulletin (MB) provides U.S. Department of Agriculture (USDA) Foods Processors updated information on the process for calculating minimum inventory protection levels. This MB is effective beginning July 1, 2014.

Title 7, Code of Federal Regulations, Section 250.32(a), requires inventory protection for the contract value of USDA Foods diverted to processors either on hand or on order. This protection ensures that school food authorities receive the full benefit of USDA Foods entitled to them in the event the USDA Foods Processor is unable to provide them with finished end products. In addition, inventory protection also ensures that processors will account for, return, and/or pay for all USDA Foods inventory (physical or book) that has been carried over from previous years. Inventory protection can be provided in one of the following three forms:

• Performance bond
• Irrevocable letter of credit
• Escrow Account [No longer accepted as a form of inventory protection]

Minimum Inventory Protection for National Processors

Processors who have a National Processing Agreement (NPA) with the USDA and have participated for one or more school years will need to maintain minimum inventory protection. The following steps outline the process for calculating the amount of minimum inventory protection needed:

• Determine the highest monthly ending inventory as reported on the Monthly Performance Reports during the 12 months beginning in December of the previous school year and ending in November of the current school year.
  
  
• Obtain the dollar value of the highest monthly inventory using the USDA estimated cost-per-pound data provided in the November 15 Commodity File Report. The November 15 Commodity File Report is available on the USDA’s Food Distribution Processor Pricing Reports Web page at https://www.fns.usda.gov/usda-fis/processor-material-prices. 
  
  
• Obtain the minimum inventory protection level required by multiplying the dollar value of the highest monthly inventory by 75 percent.

Example: Processor A is calculating its minimum inventory protection requirement for School Year (SY) 2014–15 for chicken (USDA Foods code 100103–Chix Chill Large). It has determined that:

• The highest monthly ending inventory level was 65,000 pounds
  
  
• According to the November 15 Commodity File Report (for SY 2014–15), the price per pound of this chicken is $0.8542

To calculate the minimum inventory protection requirement, Processor A will:

• Determine the dollar value of the highest monthly inventory level by multiplying 65,000 pounds by $0.8542, which equals $55,523.00
  
  
• Multiply this dollar value by 75 percent ($55,523.00 x 0.75), which equals $41,642.25

Therefore, Processor A’s minimum inventory protection requirement for SY 2014–15 would be $41,642.25.   

Minimum Inventory Protection for New Processors

If a processor is entering into an NPA for the first time, inventory protection must be secured prior to receiving USDA Foods deliveries. The minimum inventory protection levels required for new processors must equal 100 percent of the value of the USDA Foods the processor will receive in their first year of processing.  

Minimum Inventory Protection for California-Only Processors

The California Department of Education’s Food Distribution Program (FDP) will follow the same guidelines, outlined above, for calculating minimum inventory protection levels for California-only processors, whether new or returning. The FDP’s Processing Consultants review inventory protection levels annually for all processors approved under the State Master Processing Agreement and will contact those that need to obtain increased inventory protection levels.

Contact Information

If you have any questions regarding this MB, please contact the Food Distribution Program Office by phone at 916-323-0865 or by e-mail at FoodDistribution@cde.ca.gov.