Identification of mechanisms that promote and maintain the immense microbial diversity found in soil is a central challenge for contemporary microbial ecology. Quantitative tools for systematic integration of complex biophysical and trophic processes at spatial scales, relevant for individual cell interactions, are essential for making progress. We report a modeling study of competing bacterial populations cohabiting soil surfaces subjected to highly dynamic hydration conditions. The model explicitly tracks growth, motion and life histories of individual bacterial cells on surfaces spanning dynamic aqueous networks that shape heterogeneous nutrient fields. The range of hydration conditions that confer physical advantages for rapidly growing species and support competitive exclusion is surprisingly narrow. The rapid fragmentation of soil aqueous phase under most natural conditions suppresses bacterial growth and cell dispersion, thereby balancing conditions experienced by competing populations with diverse physiological traits. In addition, hydration fluctuations intensify localized interactions that promote coexistence through disproportional effects within densely populated regions during dry periods. Consequently, bacterial population dynamics is affected well beyond responses predicted from equivalent and uniform hydration conditions. New insights on hydration dynamics could be considered in future designs of soil bioremediation activities, affect longevity of dry food products, and advance basic understanding of bacterial diversity dynamics and its role in global biogeochemical cycles.