Frankly, their rationale sucks.
In particular, their points:
"No clear standards exist for defining foods as good or bad, or healthy or not healthy." -- true that it's hard to categorize everything as "good" or "bad", but that doesn't mean that it's hard to categorize some foods as bad. To use the OP's example, Froot Loops have zero value in a healthy diet.
"No evidence exists that food stamp participation contributes to poor diet quality or obesity." -- this one is a strawman; I don't think I've ever heard anyone claim that being on food stamps causes obesity. This is missing the point.
"Restrictions may be ineffective in changing the purchases of food stamp participants" -- another strawman; this one argues that food stamp rules should not change because people can spend their non-food-stamp money on something else. Who cares? I don't mind them spending their own money on whatever they want; it's just when they're taking money from my pocket that I should get some input.
Of course the USDA doesn't want any restrictions on food stamp benefits. Like every government organization, they have to justify their existence, and the more money that you can pump into their budget, the better.