By outside agency I thought they meant the local paper or even the local TV station reporting on or promoting the school
You can't assume anything. If they did not specify say what sort of outside agencies they meant, and did not specify that they had only school publicity purposes in mind, then they left it open to anyone they choose to use photos for any purpose.
If you, your child, your house is going to be used for advertising that's an entirely different ball game, usually with a load of terms and conditions and financial remuneration.
I don't think your assumption here is based on anything solid. Here is what the consent form said:
It also says that occasionally outside agencies may take pictures of the children and once those pictures are released the school has no jurisdiction about how they are used.
Not only may the outside agency take the photos themselves
, but they may then be used for any purpose the agency wants to use them. I think they are very specifically asking your consent to allow third parties to both take photos and use in any way they like here, with no responsibility on the school's part for the way the photos are used.
This is quite unusual, and there are many very obvious worst case scenarios you can imagine one of which has already happened, but there are others that would be outrageously awful (who exactly might be taking the photos and what sort of photos might they be...).
I would withdraw permission immediately, and ask the school to clarify exactly what and who they had in mind, and also ask them to use very specific wording in any future consent forms so parents know the limits of both the photo taking and also the use of images.
You always have to look at wording and ask yourself how far someone might conceivably run with it - don't assume any other party would be sensible or responsible or would act as you would like them to.
Fwiw, I want to say again that I sympathise completely with you - I think what they have done is gobsmacking. I hope you will manage to get their consent form changed in a major way.