Ramos says he grinds his own chili peppers to ensure quality.
Ramos says he grinds his own chili peppers to ensure quality. - 
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Renita Jablonski: Higher costs are forcing food makers to make a choice: Cut corners or raise prices. From the Marketplace Sustainability Desk, Sam Eaton reports.

Sam Eaton: After years running his family's Los Angeles tamale shop and restaurant Raul Ramos dreamed of bigger things. He wanted to take his mother's famous La Indiana Tamale recipe to the masses. Today that dream has become a reality. Ramos's company churns out about 7,000 hand-made tamales a day. But the global food crisis now threatens even this small operation on the outskirts of L.A. The world's rising demand for food and energy have raised the price of every ingredient he uses from pork to cooking oil.

Raul Ramos: They have never gone up this high that I can remember in the past 20 years that I've been working this industry.

Ramos's main ingredient, white corn, has tripled in price over the last year and a half. That's forced him to lay off a third of his staff.

Ramos: The customer's only willing to pay so much for the product, and I can't increase my price based on what the ingredients cost.

Morningstar analyst Greggory Warren says price is the last thing food companies want to touch, since competition in the industry is so fierce. That means the savings have to come from somewhere else. And for many companies, Warren says, that "somewhere else" is in the quality and quantity of the ingredients they use.

Greggory Warren: You know, let's say, I have a sugared beverage, and if I can use a flavor enhancer and use half the sugar I'm using now that cuts out half that cost. So it's helping to kind of maintain your margins or at least keep them from going down too far.

Kraft Miracle Whip has more water in it. Nestle snack products have less milk. Even Sara Lee has switched to cheaper wheat for some of its breads. Harry Balzer of the consumer research firm NPD Group says reducing the quality of the product may offset costs in the short term, but it could also inflict lasting damage to the brand.

Harry Balzer: Consumers will not forget this. Make no mistake about that. It will have a longer effect than just this economic downturn.

La Indiana's Raul Ramos is banking on those discriminating consumers to keep him afloat. That's why he's refused to use cheaper ingredients in his tamales. He even grinds his own red chilies. And so far, he's resisted mechanizing because hand made tamales taste better. But Ramos says if food prices keep rising, small companies like his, the ones that have maintained their quality standards, won't be among the survivors.

Ramos: If I don't know when it's going to end, I can't predict how far I can stay alive.

In Los Angeles, I'm Sam Eaton for Marketplace

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Follow Sam Eaton at @eatonsam