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

Abstract

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.

Maximum order size and market quality: Evidence from a natural experiment in commodity futures markets

“…2 See, for example, Wang, (2014), Haynes et al (2017), Couleau et al (2019), Arzandeh and Frank (2019), He et al (2021), de Boer et al (2022), and references cited in those papers. See Peng et al (2021) for a similar observation. 3 The extant literature investigates other aspects of calendar spreading in futures markets.…”

Effects of the Covid‐19 pandemic on derivatives markets: Evidence from global futures and options exchanges

“…Consistent with these findings, Ramelli and Wagner (2020) show that a firm's strong financial health in terms of its 2 Our findings of higher regional and global trading volume and open interest during the Covid period are not intended to necessarily suggest that derivatives markets developed greater market liquidity nor do they universally extend to all contract markets. To illustrate an exception, Peng et al (2021), using intraday data, find large drops in various market microstructure liquidity measures for contracts in the soybean complex in February 2020. liquidity and leverage was especially important in industries that are affected the most by the pandemic. Albulescu (2021) also finds that announcements of Covid-19 case and death figures increased US stock market volatility.…”

“…This study has documented deteriorated liquidity conditions in the US fixed‐income market, including US Government bonds (Ermolov, 2020) and corporate bonds (Kargar et al, 2020; O'Hara & Zhou, 2021). Focusing on agricultural futures markets, Peng et al (2021) find a substantial decrease in soybean futures liquidity several weeks before US equity, bond as well as other agricultural markets were impacted.…”