Making Commodity Dollars Work for You

1. Making Commodity Dollars Work for You Sandy Fisher 1-717-3601425 Malissa Marsden mmarsden@awgfood.com 815-751-7445 cell 847-816-5029 fax

2. National Overview • SFA Food purchases exceed $7.2 BILLION • Account for 15% of Non Commercial Food Purchases • Serve over 39 million meals per day • Serve more than McDonald's

3. National Commodity $ • Purchases in Excess of $800 Million • Bonus in Excess of $60 Million • Per meal = $0.20 currently-07/08 • + Bonus • Lunch only support • Secondary market: • US Agriculture #1

4. The History • WW II • Forced Distribution • Regional USDA • States • Schools • No control over when where what or why • Not a user friendly form: 40 # blocks of cheese

5. Commodity Groups Available • Group A PAL • Group A Bonus • Group B PAL • Group B Bonus • Commodity Processing

6. Group A PAL • Meats, Fruits, Vegetables • Can be raw or further processed by the USDA (turkey taco meat) • May be frozen, canned or fresh (DoD) • May or may not be purchased by the USDA • depending on crop production and price • Used to support agriculture • Most common category thought of when commodities are mentioned • Order maximum that you can use in one school year • Total allocation of one item may be delivered at one time. • May be delivered any time in school year: July 1 – June 30th • ECOS allows SFAs more input in selecting delivery periods?

7. Group B Annual Order Form • Monthly delivery order of specific foods including: • Cheese • Flour • Pasta • Oats • Vegetable oil • Peanut butter • Purchases more stable than Group A foods • All items listed substitutable

8. IV. Group A or B Bonus Commodities • The Secretary of Agriculture may declare a bonus purchase. The case value of that commodity will not be deducted from your PAL dollars. • Order the maximum amount you can use.

9. What is Commodity Reprocessing? • Government gives schools commodities which can be turned into value added items by manufacturers • Cheese = Pizza, Cheese Dippers • Whole Chickens = Nuggets & Patties • Peanut Butter = Sandwiches • Potatoes = French Fries, formed potatoes

10. Agreements • Each State determines how the commodities will be distributed/offered • Some allow total choices in items • Some have commodity advisory boards • Two Forms in general • State Agreement • Master Agreement

11. State Agreement • The State DA chooses items to be ordered • The State DA chooses items to be offered as further processed • The State bids for the said further processed items based on their “spec” • Often Cheap, cheaper, cheapest with little “best value” • Can be multi year awards • The manufacturer bills the State • One bill, one customer • The schools receive the further processed items from state warehouse or designated warehouse

12. Master Agreement • State enters into contract for items to be processed • i.e. chicken, beef, pork, cheese • Manufacturer’s must solicit enough business for at least one full truck to be eligible for contract • Schools elect their choices by diverting pounds to a manufacturer • Each school chooses manufacturer, item and form of processing • Must be approved by the state to survey the schools • A hunting license for a manufacturer • Marketability key

13. State to State • Each has own system, timing rules • Contact your state • Follow their rules • Work with them • Some allow rebates and indirect discounts, some don’t • Some do not process

14. National ProcessingNPA • Processor obtains agreement with USDA • Signs State Participation Agreement (SPA) with individual states • SPA modified for specific state approved sales methods and other conditions • Commodity commitments by SFAs may be combined with those from other states to make a truckload quantity

15. ECOS • Electronic Commodity Ordering and Reporting System • All State order all commodities on ECOS • Some States have rolled ECOS down to RA’s • ECOS allows SFAs more input in selecting delivery periods?

16. True Cost of Commodities • 85% of a schools purchases are commercial purchases • 15% arrive as a commodity value • REAL $$$ • Real Asset • Combine the two for total budget • Not Free • At first not easy • Ever Changing, getting better every day

17. Commodity ProcessingValue Pass Through (VPT) • 3 Types • Fee For Service • Rebates • NOI (Hybrid indirect discounted sale) • The amount of $$ spent is controllable. • Processing total plus Group B total must be less than total PAL $$$$

18. Fee For Service • Manufacturers charge a fee per pound/case to process commodities into finished product • Manufacturer bills each school, each delivery • Separate distribution, state warehouses • Often processed with minimum run requirements • Most often thought of in conjunction with processing meat and poultry • Can be billed to school or distributor can bill it but still not substitutable.

19. Rebates • School pays full list price and must submit for rebate • Manufacturer must cut check to each school multiple times per year • E-Rebates: distributor submits tracking report (electronically or excel) to manufacturer and manufacturer sends rebate check to school • School then verifies purchases = rebate due • Products utilizing substitutable commodities – cheese and flour

20. Net Off Invoice • Consumer Driven Supply Chain • Consumer Driven Product Offerings • Expanded options • Uses schools current distribution • Uses the same products for commercial/commodity purchases • Schools receive a discount at time of purchase, off invoice • Manufacturers work with distributor bill backs • Far fewer points of discount • Just like bid allowances • Only certain schools pre-enrolled • Different values per case • Verification Required

21. NOI Benefits • NOI allows seamless distribution- • Many consider that priceless • One invoice to check • One bill to pay • Multiple deliveries per month • Flexibility in menuing changes • Branded products • On Trend products available much quicker • Fully Cooked; Labor Saving; Easy and quick retherm; Food Safety w/no raw poultry

22. What’s in it for Distributors? • Control over inventory • Control over center of the plate • Bigger drop size • Bigger customer • More cases moved • Value added service a school will depend on/require on bids

23. Revenue Source • Commodities never should be considered “free food” – you are spending real dollars • SFA need to evaluate using their PAL dollars with as much care as they do when they spend $ from the FS fund. • Merge two accounts into one • Increased options = increased ADP • Every ADP = $0.42 + ($0.20 + $0.22)

24. Accounting • Stabilize Plate Cost • Stabilize Food Cost • Stabilize Menu Cost • Utilize Asset (PAL $) in same fiscal school year = Happy Bean Counters

25. Administrative Costs • Cost of paying a bill • Cost of managing multiple suppliers of same or similar products • Inventory Costs

26. Hard Costs • The true cost of a food item includes: • Value of commodity • Processing fee if any, • or distributor charge • Any State Fees • Delivery charge to your warehouse if any • Storage costs if any • Redelivery cost for you to redeliver within the district if applicable

27. Soft Costs • Hardest to calculate • Storage: variable • State warehouse deliveries = more invoices, delivery charges, storage charges • If limited delivery times = more storage needs (freezer, cooler space) • “Brown Box” commodities can vary in acceptability due to change in winning bidders: sodium, color, taste, texture • Kids do not like changes

28. Decisions, Decisions, Decisions…… When to utilize PAL $$’s and When NOT to

29. Brown Box - VS – DiversionChicken, FC Breaded 8-way Cut

30. Sample Bid Specification

31. Sample Bid Response – Beef Patties

32. Determining the REAL COST – Beef Patties • Calculate the value of the raw commodity per case. (= number of lbs. DF needed to produce (1) case x November 15th price file.) • Brand A: 17.2 x $1.41 = $24.25 • Brand B: 26.26 x $1.41 = $37.03 • Brand C: 20.1 x $1.41 = $28.34 • Add the fee for service (FFS). The result is the REAL COST/case. • Brand A: $24.25 + $12.09 = $36.34 • Brand B: $37.03 + $22.07 = $59.10 • Brand C: $28.34 + $16.12 = $44.46 • Divide the real cost per case by the number of servings per case. The result is the REAL COST/serving. • Brand A: $36.34 / 96 = $0.3785 • Brand B: $59.10 / 200 = $0.2955* • Brand C: $44.46 / 135 = $0.3293 • Make sure that product nutritional information matches the specification and make sure that your customers will accept the product. * The low bid offered at $0.2955 per serving contains 8.3% VPP, which exceeds the 5% bid specification. In this case, the low bidder would have been justified out for not meeting the bid specifications. * 06/07 pricing

34. The Future • What can we expect tomorrow? • More Changes • Improvements • More Challenges • More Opportunities • More children to feed • Economy – Labor – Food Safety

35. Predictions/Prayers • ADP goes up • Commodity Reimbursement goes up • SNA & ACDA are seeking $0.10 commodity support for breakfast • SNA continues to push for ERP which conservatively could bring in 1 million more lunches per day and dramatically increase breakfast ADP (preliminary studies) • Education & training of all partners continues

36. ACDA • American Commodity Distribution Association • Started as an organization for State DA’s • Devoted to improvement of the USDA Commodity Food Program • USDA – FNS, AMS, FSA and other Federal Partners • Industry • Associate Members • Broker, Distributors, Coops, State SNA representatives • Give more power to vote for state associations • Allied and Agriculture Members • Fruit Boards • Associations such as Beef, Citrus • RA members • Individual membership • Newest membership category • Fast growing membership

37. Resources • NPA Team, FDD, USDA • 1-703-305-2680 • www.commodityfoods.usda.gov • www.commodityfoods.org

38. Questions?

39. Thank You!