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Darkness falls on USDA lockup room


By Robert Plummer

BridgeNews

NEW YORK (B)--Only a handful of people see the U.S. Department of Agriculture's monthly crop report before it is beamed around the world, and I was one of them--and I had to go to the bathroom. My request was met with hesitation by USDA officials; then I was told that I would not be going alone.

Journalists are supposed to remain penned in the so-called lockup room at USDA headquarters in Washington, DC, until the data are released at 8:30 a.m., but the morning coffee was kicking in.

I was accompanied by a female official and as we walked closer and closer to the men's room I started to wonder what they meant by "alone."

She did not follow me in, but I could see her silhouette through the frosted window of the restroom door. Was her ear against the glass making sure I was not dialing a broker in a foreign land telling him to buy corn futures? Was she worried that I might be signaling a buddy through the bathroom window?

As I turned to dry my hands I realized she needn't worry about the window. It was covered with a hard white plastic curtain securely fastened with metal rods to the window pane. Completely tamperproof. There are similar shades on all the windows in this wing of the USDA's fifth floor, and they are drawn tight until the crop report is released.

The shades do more than keep the sunlight out. They are embedded with lead fibers making electronic communication in or out of this section of the building impossible.

The window treatments come courtesy of E.S. Holmes, an associate statistician at USDA who realized in 1905 he could pad his government salary by teaming up with Louis Van Riper, a cotton speculator, and tip him off to the cotton crop data before it was made public. Holmes used his office window shade as his form of communication: lower on the sash for bullish, higher for bearish and in the middle for an as-expected figure.

Back then, the crop report came out in the afternoon while the futures markets were open, so Van Riper could take his inside information and manipulate the cotton market. The ruse reportedly netted the pair several hundred thousand dollars.

A last-minute change to the USDA data in June 1905 led to the end of the scam. Holmes was unable to get a signal to Van Riper following the adjustment and Van Riper lost about $25,000. Van Riper, not known for being a good loser, demanded an investigation and Holmes eventually lost his job.

But as technology advanced, USDA had to worry about more than just window shades, expanding its security measures to include cellular phones and laptops.

The USDA's monthly report, which contains government crop estimates on everything from soybeans to cotton, routinely touches off wide swings in commodity prices. To protect against leaks, the USDA seals off the south wing of its fifth floor eight to 10 hours prior to the release of the report while employees compile and format the data.

News agencies are allowed to enter a small room in the lockup wing about 90 minutes before the data are made public. But they are forbidden from establishing any sort of connection to the outside. So they spend the next 89 minutes in a flurry of typing and formatting stories, all under the watchful eye of USDA officials.

At exactly 8:29 a.m. an official announces that phone and computer connections can be reestablished, but no data can be transmitted. A large red digital clock hangs on the wall as the seconds count down to 8:30, when "Go" is yelled and the click of a mouse pushes the data out to the world.

USDA is not alone when it comes to over-the-top security for market-sensitive data. The Commerce Department takes similar steps with its GDP data and the Labor Department does the same for monthly employment report. A leak in any of those figures would provide a trader with a huge advantage.

For example, corn traders would have loved to have gotten an early word on the Oct. 12 USDA crop report. In it, the government cut its estimate for the U.S. corn crop by 170 million bushels. The news caused corn futures in Chicago to rise 3% that day. If a trader tipped off to the bullish forecast had gotten long 100 contracts and sold into the rally after the data were released to the public, he or she could have netted a cool $30,000.

As long as there is that kind of money at stake, the government will need to remain vigilant about guarding its data.

More than 100 years after Holmes and Van Riper pulled a fast one on the government, there have been rumors of information about USDA reports leaked via cell phones taped underneath toilets the day before the report, with deep throats whispering in darkness hours before the data are released. But USDA officials say they are just that--rumors. And after experiencing two hours in the airtight security, I would say I have to agree.

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