Cotton production in Australia is expected to continue to increase, at least until 1992.

Output is tipped to expand in response to good market conditions and improved world prices.But the industry has been warned that sharp increases in cotton prices relative to synthetic fibers could lead to some dampening in demand.

The Australian Bureau of Agricultural and Resources Economics said the short-term outlook for cotton depends on whether consumers remain loyal to natural fibers and also on the effects on Western economies of last year's stock market decline.

ABARE research has indicated that, given the expected slowdown in the rate of increase in world cotton plantings, both production and demand are likely to remain in balance up to 1992.

The bureau has cautioned cotton growers that the main challenge will come

from an increase in capacity in the world synthetic fiber industry.

The bureau has predicted that the area planted to cotton in Australia would stabilize at about half a million acres.

But, the bureau said, yields from Australian plantings will increase. The Australian fiber would continue to attract premium prices because of its high quality.

It is expected that Australian production will rise from 228,000 tons this year to 300,000 tons in 1992.

But since Australia is the world's driest continent, water supply and recurring droughts play an important role in the production of most major crops, particularly cotton.

The cotton industry has been warned that significant expansion of irrigated production might be limited by the fact that present public water storages were fully committed.

Industry analysts expect cotton prices to remain strong for most of this year, at levels about 37 percent above last year, with returns to Australian growers averaging about 80 U.S. cents a pound.

Exports this year are expected to be at least 200,000 tons.

Latest figures indicate world cotton production will increase by almost 11 percent this year to 16.8 million tons.

Consumption this year could reach 17.9 million tons. Stockpiles at the end of the year could fall to less than 6 million tons.

The center of the Australian cotton growing industry is the Namoi Valley in the state of New South Wales.

The industry in the valley was started only as recently as 1961, when two Californian cotton growers liked what they saw and bought land in the district.

They planted only 65 acres of cotton, but reaped a good harvest.