Out to Pasture

USDA is busy trying to figure out how to handle announcements of market sensitive releases in the 22 hour trading day. I hope while they are figuring, they will include market-sensitive releases from APHIS and other agencies as well.

I know the guys involved in the BSE case are busy.  But that doesn’t mean somebody at USDA shouldn’t be able to find a few minutes to pay some attention to the way somebody in USDA apparently leaked the California BSE cow to futures traders, who promptly broke the market at the expense of the unaware.

It’s pretty clear what happened on the day of the announcement. A few minutes after an "internal" announcement, futures traders knew that the agency planned an afternoon BSE press conference. It’s hard to know where the leak came from. The California lab knew they had a potential positive when they sent it to the national lab four days before the announcement. So a leak could be at one of the labs. It’s possible that the leaker was somebody else who knew before the internal announcement. USDA—wisely, I would argue--shares the secret with droves of stakeholders  before its official announcement, to help them prepare for the firestorm of publicity that follows such news.

I’ve heard lots of rumors about where it leaked. But as near as I can tell, I’m the only one even asking USDA about it. The guys at CFTC asked for information on how the release was handled, but I doubt there is anything they can do about it. It’s not illegal for people to use insider information such as this in the futures market. So even if CFTC finds how it happened (and they don’t comment either way on possible investigations) they’re not the ones to patch the leak.

The leaks should be patched by USDA. But if there is any interest in the agency, I failed to find it.

Incredibly, there is, no—zero—control on how the information is handled. Unlike other market-sensitive USDA reports, APHIS—which is run by public service veterinarians with little experience in the cattle business—apparently doesn’t think insiders trading on their inhouse knowledge is a problem worth worrying about. At one point, speaking on "background" as if I were asking for nuclear codes or something, one of the people in the agency’s public information office’s told me "we’re looking into it." But he wouldn’t offer details and I found no more signs of it.

At another point, I got a timeline. An "internal announcement"—to whom, I don’t know—was made at 11:12 a.m. on the 24th. Within minutes, the futures board was crashing. The agency had to move the announcement forward. If something like that happened before a grain crop release, USDA would be on it like hump on brahman. And rightly so.
But if anybody at APHIS cares, they kept it from me. "Their hands are full," a USDA press representative told me.

I want to be clear and fair about this: USDA did a good job of managing reaction to this latest BSE foible. Thanks to them, NCBA and the checkoff-funded issues management team, the media seemed generally well-informed this time.  Good job. I’m not suggesting that finding—or more importantly, plugging—the leak is the most important bolt in the APHIS machine. But it’s a loose bolt and every loose bolt should be tightened.

The last thing I heard from the press office was that APHIS "would get back to us" if they decide to do anything.

They don’t think it’s important.

I could point them to some cattle feeders who do—especially one fellow I talked to who tells me he thought the limit-drop in the market that day was "just one of the funds pulling out or something," since there was no visible logic behind the fall. So he, a straddler like most feeders these days, lifted his short positions only to find out later that the guys in Chicago were reacting to the insider leak from APHIS. If the market hadn’t recovered some before the close, there would be more such stories. As it is, most of the cattle feeders I’ve talked to seem disinclined to raise a stink about it.

Nobody got badly hurt this time. But next time, it could be far worse. There are things that APHIS might one day announce that would lock the board down for days. APHIS has great planning processes. Goodness. Go look at their Procedure Manual for BSE surveillance at www.aphis.usda.gov/animal_health/.../BSE_Procedures_Manual.pdf. There are like 41 pages of carefully forethought procedures. But not one word about keeping it quiet. It’s like they never thought of this maybe breaking some poor unawares hedgers—and it could

APHIS should, along with its veterinary-centric plans about isolating this, depopulating that and tracing that other thing, include confidentiality agreements with everybody—from lab technicians to agriculture secretaries--who is privy to such information.

I’ve granted this is not the most pressing issue on APHIS’ plate. But it should be taken seriously nonetheless. If that’s happening, their PR staff is doing a good job of hiding it from me.

The Commodity Futures Trading Commission has apparently asked USDA for a timeline on the announcement Tuesday about the BSE cow in California.

Good. CFTC is the regulator that would be charged with finding out who got wind of the upcoming announcement to get in front of the futures panic.  We don’t know if any laws were broken, but it’s good the regulators are looking.

At the least, we should know how the leak happened. I would hope USDA has its own investigation underway. Again, the agency should make sure such leaks don’t give insiders a chance to bilk the unwary.

Hold on. Before you read the blog below, realize that the beef industry’s issues management team was NOT in the official loop. It turns out their preemptive efforts—the getting ready for the announcement—was based on the same "rumor" that the futures traders were acting on. The rumor was based on a leak, of that there seems no doubt. The beef stakeholders weren’t officially notified until 3 p.m., well after the futures market crashed.

My mistake, evidenced below, is that it turns out there weren’t nearly as many people in the official loop as I thought. I presume that when I asked the USDA official I talked to on background if stakeholders knew in advance and he replied in the affirmative, he meant the 3 p.m. conference call and I meant before the leak. On the one hand, I’m sorry to hear that USDA doesn’t realize the importance of working with the industry to minimize panic, but on the other hand, it means our guys weren’t the leakers.

I’m waiting for a callback from USDA and if it turns out such isn’t so, I’ll file an update later. But meanwhile, I wanted the clarification online.

Before we get into this rant, consider the story in the Washington Post this morning about how the beef industry’s quick response helped allay the damage from the latest BSE scare.

I just love the beef issues management team. They’ve saved our hides several times. I will grant that their response matters more to the well-being of the industry than my rant about insider trading.

BUT:
USDA goes to a lot—a LOT—of trouble to protect the markets from insider trading on crop reports and things like the cattle on feed report. They brag, in fact, of the iron-clad security that precedes precisely timed reports.

That’s good. Lots of times, an early heads-up on a key report would be worth millions to traders with inside information, and those millions would come out of the pockets of those without the insider information.

But there is no such safeguard with things like Tuesday’s announcement that a California dairy cow had been diagnosed with BSE, even though everybody knew the news would break the market. Nobody who knew in advance should have been allowed to trade or talk to traders.

But somebody did. By noon the "rumor" was out and those in the know were going short at the expense of those who weren’t in the know.

That is not good. It is not fair. If I’d had some yearlings going through the sale ring about 1:30 when the buyers’ cell phones rang, I’d be plenty miffed.

I know, I know. There is a big difference in the two types of releases. I sure don’t want USDA just suddenly announcing they have a BSE case without warning the stakeholders like the beef industry’s issues management team. That team did a bangup job—again—on backfiring this thing. They couldn’t have done it as well without advance knowledge. That’s more important than a few bucks won and lost in Chicago.

But I presume somebody, some of the scores of folks who knew the announcement was coming, called a buddy and spilled the beans. The buddy made a lot of money (at least short-term, though we can hope the late session and Wednesday rally taught him a lesson)

The larger point is this: Had this been a more serious problem—an FMD outbreak for instance—the board might have locked down—or up—for days on end. USDA needs a system to safeguard this stuff. I don’t know how you do it and keep everybody in the loop, but I might start by requiring them to sign privacy pledges and promising that leaks would be traced and prosecuted. In the Army, we had a thing called "need to know" and we weren’t allowed to tell guys secret stuff unless they had the proper clearance AND had a specific need to know. And once they knew, they were bound by the same rules.

The fewer people who know a secret, the easier it is to trace a leak.

As it stands, the Commodity Futures Trading Commission could probably identify some suspects. (CFTC reminds me they neither confirm nor deny investigations.) But I doubt there was anything illegal done.So far as I know, there is no law against some state vet calling his brother in Chicago with the tip nor with the brother making use of the tip.

But there should be, and I’d hope USDA and the industry will give it some attention.

For a long time, I’ve been arguing that another case of BSE in the U.S. herd would be a non-event. Now that USDA has confirmed a case of—importantly—atypical BSE in a cow from a California dairy (of course, he interjected snidely), we’ll find out.