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Cotton is produced in many countries, but the northern hemisphere accounts for nearly 90 percent of global output. More than two-thirds of cotton is produced by developing coun-tries. During the last four decades cotton production grew at an annual average rate of 1.8 percent to reach 20 million tons in 2001 from 10.2 million tons in 1960. Most of this growth came from China and India, which tripled and doubled their production, respectively, during this 40-year period. Other countries that significantly increased their share of cot-ton production were Turkey, Greece, and Pakistan. Some "new entrants" also contributed to this growth. Australia, for example, which produced only 2,000 tons of cot-ton in 1960, averaged 650,000 tons during the late 1990s. Francophone Africa produced less than 100,000 tons in the 1960s and now produces ten times as much. The United States and the Central Asian republics of the former Soviet Union, the two dominant cotton produc-ers during the 1960s, have maintained their output levels at about 3.5 and 1.5 million tons, respectively, halving their shares. A number of Central American countries that used to produce almost 250,000 tons of the fiber now produce virtually none. The share of East Af-rican cotton producers has declined considerably during this period.

Consumption of cotton is primarily determined by the size of the textile industries of the dominant cotton consumers. China, the leading textile producer, absorbed more than one-quarter of global cotton output during the late 1990s. Other major textile produc-ers (and hence major cotton consumers) are India, Turkey, and the United States, which together with China account for three-quarters of global cotton consumption. Several East Asian countries have emerged recently as important cotton consumers. For example, In-donesia, Korea, Taiwan, and Thailand, which consumed only 130 thousand tons in 1960 (1.2 percent of global consumption), absorbed 1.5 million tons in 2002 (7.2 percent of global consumption).

Between 1960 and 2000, cotton demand has grown at the same rate as population (1.8 percent per annum) implying that per capita cotton consumption has re-mained stagnant (figure 1). By contrast, consumption of chemical fibers has increased con-sistently over the last four decades, causing cotton's share in total fiber consumption to de-cline from 60 percent in 1960 to less than 40 percent in 2000.

One-third of cotton production is traded internationally. The four dominant export-ers-the United States, Uzbekistan, Francophone Africa, and Australia-account for more than two-thirds of world exports. Four major producers-China, India, Pakistan, and Tur-key-import cotton to supply their textile industries. Currently the eight largest importers account for more than half of world cotton imports. The four East Asian textile producers-Indonesia, Thailand, Taiwan, and Korea-accounted for 22 percent of world cotton imports in 2002, compared to just 3 percent in 1960.The International Cotton Advisory Committee (ICAC) collects data comparing costs of production among cotton producers. In its most recent (2001) survey, based on a ques-tionnaire of 28 cotton-producing countries, ICAC suggests that West Africa (especially Be-nin, Mali, and Burkina Faso), Uganda, and Tanzania, are among the lowest-cost cotton producers. High-cost producers are the United States, Israel, and Syria. Two European cot-ton producers, Greece and Spain, are probably the world's highest-cost producers, al-though they did not participate in the survey.

Real cotton prices have declined over the last two centuries, although with tempo-rary spikes. The reasons for the long-term decline are similar to those characterizing most primary commodities: reduction in the costs of production due to technological improve-ments, stagnant per capita demand, and competition from synthetic products. Between 1960-64 and 1999-2003, real cotton prices fell by 55 percent, quite similar to the 50 percent decline in the broad agriculture price index of 22 commodities.

Reductions in the costs of production have been associated primarily with a dou-bling of yield during the last 40 years, from 300 kilograms per hectare in the early 1960s to surpass 600 kilograms in 2000. The phenomenal growth in yield was aided primarily by the introduction of improved varieties, expansion of irrigation, use of chemical fertilizers, and mechanical harvesting. Developments in genetically modified seed technology and precision farming, introduced in the late 1990s, are expected to further reduce the costs of production. Substantial technological improvements have also taken place in the textile sectors, so that the same quality of fabric can now be produced with lower quality cotton, a trend that holds for many products whose main input is a primary commodity.

During the last 10 years, nominal cotton prices fluctuated between $2.53 per kilo-gram in May 1995 and $0.82 per kilogram in October 2001. The post-1996 decline in prices was a result of various factors, including: excess production in 1997-98; weak demand from the East Asian textile producers affected by the financial crisis of 1997 (In-donesia, Republic of Korea, and Thailand together account for some 15 percent of cotton import demand); record stocks, reaching 9.8 million tons in 1997-98 and pushing the stock-to-use ratio to 0.51, the highest since 1985-86; low chemical fiber prices reflecting currency devaluations of several East Asian producers; and the strength of the U.S. dollar.During their decline, cotton prices have been volatile. The nature of volatility, how-ever, has changed considerably during the last 40 years. A simple measure of volatility shows that during 1985-2002 volatility was 2.5 times greater than in 1960-72, but only half as great as in 1973-84.