Canary in the Coal Mine: COVID-19 and Soybean Futures Market Liquidity

We document the impact of the early stages of the COVID-19 pandemic on liquidity in U.S. agricultural markets. Notably, we show that soybean futures-market depth collapses weeks before the U.S. financial markets' crash of March 2020. Soybean futures liquidity is affected the earliest, the most, and the longest. Soybean depth drops by half for outright futures and by over 90 percent for calendar spreads, and soybean bid-ask spreads increase significantly. This liquidity pullback starts on the night of February 12 to 13, 2020 - a full two weeks before (i) liquidity evaporates in U.S. bond and equity markets and (ii) soybean prices start to fall sharply. The start of the soybean liquidity pullback coincides with overnight news of bleak COVID-19 developments in China (a dominant source of world demand for oilseeds). Following a series of emergency interventions by the U.S. Federal Reserve in March and April 2020, liquidity recovers in the soybean outright futures market - but depth remains abnormally low for calendar spreads. These patterns cannot be explained by other factors, such as seasonalities or changes in soybean futures trading volume and price volatility: the COVID-19 shock was novel, and it destroyed soybean-market liquidity in a way that foretold financial-market developments two weeks later. In contrast to soybeans, we find little evidence of a drop in corn or wheat futures liquidity until U.S. financial and crude oil markets sink in early March. Soybeans were truly the canary in the coal mine.