dougmwne's right. Though I can't find my poster online (for the life of me), the technical manual is pretty clear:
[...]The various waste sludges recovered from the water recycling processes are a valuable resource. The organic waste processing system subjects the sludge to a series of sterilizing heat and radiation treatments. The waste is then electrolytically reprocessed into an organic particulate suspension that serves as the raw material for the food synthesizer systems. Remaining byproducts are conveyed to the solid waste processing system for matter replication recycling.
[...]
Material that cannot be directly recycled by mechanical or chemical means is stored for matter synthesis recycling. This is accomplished by molecular matrix replicators that actually dematerialize the waste materials and rematerialize them in the form of desired objects or materials stored in computer memory. While this process provides an enormous variety of useful items, it is very energy intensive and many everyday consumables (such as water and clothing) are recycled by less energy intensive mechanical or chemical means. Certain types of consumables (such as foodstuffs) are routinely recycled using matter replication because this results in a considerable savings of stored raw material (See: 13.5).