Let’s start with a percentage- 60%. Do you find it high? Is it low?
That’s about how much garments factories spend on raw materials as a percentage of their total cost. And can you guess the primary raw material for ready-made garments (RMG) companies?

It’s cotton, as you may have guessed already from the image above.

So imagine the effect on RMG companies when cotton price almost tripled in 2 years. Cotton price per pound (0.45kg) was about $0.50 even two years ago. Now it’s $1.35. The pandemic and supply chain crisis increased the price of cotton. But on top of that, now we have a drought in the United States. For the record, the US is responsible for about 35% of the global cotton export. March-June is when cotton is usually planted and drought during this period is making people skeptical about how much the US will be able to produce.

But how do you think the market will react if there is doubt about a major cotton-producing country’s crop yield? Price will go up fearing low supply. And that’s what is happening. The last time the US saw a drought like this in 2011, cotton price reached $2.27 per pound. So safe to say, it’s on an upward trajectory. Additionally, the biggest cotton importer in the world, China has also increased its import, putting upward pressure on price.

And guess what? Price has been increasing sharply in India too, where Bangladesh imports most of its cotton from. The way global trade works, if cotton price increases in on part of the world, it propagates everywhere quickly, as everyone tries to sell wherever the price is the highest.

And this is going to put pressure on Bangladeshi RMG companies with their biggest cost just increasing by a wide margin. And add on top of that, the interest rate increase by the US central bank to tackle inflation. This will likely decrease demand for clothes, putting further pressure on Bangladeshi RMG companies. Things are looking bleak for Bangladesh’s foreign reserve too. We import about $12B of cotton a year, our highest imported commodity. This cost will increase further with increasing cotton price and exchange rate. On the other hand, export earning is likely to shrink from lower demand.

We can almost surely say, the coming days are going to test our RMG industry’s resilience, just like Covid did.

Until then…