Soil carbon is created by plants & associated soil microbes which capture and transform plant-generated liquid carbon (photosynthetic plant sugars).
Both live & decaying plants are a carbon source for microbes to feed on. Fungi in particular absorb the carbon into their cells & turn it into complex, recalcitrant (difficult to break down) carbon polymers, & acids, eg. humic acid. Fungi also produce sticky carbon rich substances which bind organic matter creating soil structure. As fungi are consumed by other soil microbes or die in the soil, their stored carbon, along with glues they produce creates humus, a long-term soil carbon storage polymer, a sponge which provides soil structure, allowing oxygen and water to move into soil. Humus absorbs water & nutrients, which are then slowly released as the plants need them. Humus can hold 80–90% of its weight in moisture, providing plants with drought resistance.
Unfortunately, current agricultural practices disturb & kill fungal networks which capture & store plant carbon in the soil. This includes tillage, synthetic fertilisers, pesticides, herbicides & grazing cattle. Such practices degrade the living soil ecosystem, releasing carbon into the atmosphere, warming the Earth, increasing water evaporation & severity of fires, being the main contributor to the devastating effects of climate change.
*A 1% increase in soil organic carbon equates to about a 2% increase in water holding capacity. So a soil with a water holding capacity of 200 mm will hold an additional 4 mm of water.