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6.4: Cyclical Component

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    A cyclical pattern repeats with some regularity over several years. Cyclical patterns differ from seasonal patterns in that cyclical patterns occur over multiple years, whereas seasonal patterns occur within one year.

    One example of a cyclical pattern, the business cycle, is from macroeconomics. Over time, economic expansions are followed by economic recessions followed again by economic expansions. There is not perfect regularity in the business cycle, as expansions and recessions differ in length. Nevertheless, this process has repeated itself over and over through time.

    Cycles are also observed in some agricultural commodity prices and are most pronounced when there is a time lapse between a change in price and the producer’s response to this change. The time lapse is due to two things:

    1. A biological lag. The biological lag refers to the length of time between the decision to expand production and the resulting change in supply.
    2. A psychological lag. The psychological lag is the length of time when prices must be high or low in order to convince producers that production plans should be changed.

    Price cycles emerge when future production decisions are based on current prices and when producers have little control over prices (i.e., when producers are price takers). Thus, cycles are more likely to emerge in industries where there are a large number of relatively small operations. Price cycles are also more likely when there is a a large degree of control over output. Otherwise, random shocks tend to disrupt the cyclical pattern and cause it to dissipate. For this reason, cycles are often more common for livestock than for crops.

    One commonly mentioned price cycle is the cattle cycle. The cattle cycle lasts about 8 to 12 years from peak to peak or trough to trough. There is some evidence of cycles, albeit shorter cycles, in hogs and broilers. Demonstration \(\PageIndex{1}\) shows monthly feeder cattle prices from the nearby feeder cattle futures contract from the mid-1970s through 2016. The raw prices are plotted as red points and a centered 12-period moving average is superimposed in blue. Do you see any evidence of a cattle cycle in these data? The demonstration allows you to examine the data in both nominal and real terms. Evidence of the cattle cycle is easier to see if you look at the data in real terms.

    Demonstration \(\PageIndex{1}\). Feeder Cattle Prices with 12-Month Centered Moving Average (Sept. 1973 through Dec. 2016)

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    This page titled 6.4: Cyclical Component is shared under a CC BY-SA 4.0 license and was authored, remixed, and/or curated by Michael R. Thomsen via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.

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