Food price volatility helps SignalDemand

A truckdriver unloads his cargo of corn into a chute at the Lincolnway Energy plant in the town of Nevada, Iowa, December 6, 2007.

CHICAGO (Reuters) - When corn prices shot above $7 per bushel early this summer, food companies cringed -- but they winced again when corn prices fell just as quickly a few months later.

The volatility has been good for SignalDemand, a privately held company whose software helps food makers set product prices when input costs are skewing wildly.

"The volatility has helped us grow faster than I think we otherwise would," Mike Neal, founder and chief executive officer of San Francisco-based SignalDemand, told Reuters in an interview.

The five-year-old SignalDemand was started with venture capital money. Neal did not disclose sales or earnings, but said that for the fiscal year ended in February, sales were up more than 10 times the previous year.

Sales have increased since then, but Neal doubts the growth rate will match that of the previous year's.

The price of corn, an important feed and food ingredient, moved higher in 2007 due to increased use by makers of the biofuel ethanol. Early this summer, corn prices soared further as Midwest flooding threatened the U.S. crop. But as the waters abated and the crop improved, prices fell.

"The corn crop coming in like it did and driving the price back down has just wreaked havoc on our customers' ability to forecast their costs," said Neal.

There has been similar price volatility in wheat, soybeans, and soybean oil, which also are used in food production.

If market volatility slows, Neal still expects SignalDemand's business to remain good.

"I guess you could infer that a reduction in volatility is bad. But I don't see it that way. There is still a lot of uncertainty about how to set prices in this environment. Our phone has been ringing pretty hard," he said.

LOOKING TO EXPAND

While SignalDemand already boasts some of the nation's largest food companies as customers, the recent volatility has others calling, said Neal.

Among the firm's customers are Cargill Inc, Hormel Foods Corp (HRL.N), the Farmland Foods unit of Smithfield Foods Inc (SFD.N), the Seaboard Foods unit of Seaboard Corp (SEB.A), and Chiquita Brands International Inc (CQB.N).

SignalDemand's software uses algorithms and econometric modeling, allowing customers to input the cost of ingredients such as corn, wheat, or soybean oil, to determine how much to charge for finished products.

Companies can also calculate how high or low their prices need to be in the future, because sales contracts to restaurants and other food service customers are often for a one-year period.

"The tremendous volatility is making people nervous about long-term contracts," said Neal.

While such pricing methodology may not be unique, SignalDemand appears to be one of the few companies that offer it on a large-scale basis, said Len Steiner, a food industry consultant with Steiner Consulting.

"There are other people who are doing it; we are doing it, but not on as broad of scale as they are," said Steiner.

Many companies set their product prices in-house in order to protect proprietary information, said Steiner.

Though food companies have been SignalDemand's main target, the company is looking to apply its price-setting technology to the pulp and paper industry.

(Reporting by Bob Burgdorfer, editing by Matthew Lewis)