The rally in soyoil, which has taken prices to their highest in nearly two years, could gain further momentum from a "ramp up" in use by biofuel manufacturers.

American consumption of the vegetable oil will "rebound well" from a decline in consumption to its lowest level in a decade in the 2009-10 marketing year, which closes at the end of this month, the US Department of Agriculture said.

The decline in use had been fostered by "very slow" demand from biodiesel manufacturers, who have been discouraged by Washington's failure to extend a $1-a-gallon tax credit for blending the biofuel with forecourt diesel.

"In June, [refiners'] demand for soybean oil dropped to 88m pounds, the lowest monthly use since February 2006," the USDA said.

However, America was set for a "strong recovery" in biodiesel production, encouraged by rising consumption levels laid down in biofuels legislation.

'Further strengthen'

"Soybean oil prices have already seen some increase recently with a tightening of the global vegetable oil market," the USDA said, in follow-up comments to last week's influential monthly report on global crop supply and demand.

"That price movement could further strengthen once the biodiesel producers start to ramp up production."

Chicago soyoil for September stood at 41.79 cents a pound at 10:30 GMT, up 0.8% on the day, if below the intraday high of 42.71 cents a pound reached on Monday, the highest level for a spot contract since October 2008.

Besides prospects of tightening US supplies, soyoil has also been supported by a strengthening across vegetable oil markets, following drought damage to sunflower crops in the former Soviet Union, and fears for plantation damage from heavy rains in Indonesia, the world's top producer of palm oil.

Palm oil in Malaysia hit 2,737 ringgit a tonne on Friday, its highest level since May last year.

Heat stress

The USDA's comments came as it highlighted the support that soybean prices have received from rising grain markets, which have "heightened the competition for cropland next year", as well as soaring exports.

Cash prices for soybeans at Illinois elevators were, at nearly $10.50 a bushel last week, up by more than $1 a bushel from June.

The report also noted that two months of hot and dry weather had stressed soybeans crops in the south east of the US and the Mississippi Delta, putting yield forecasts for these regions "down substantially from a year ago".

However, with the area responsible for only 15% of US soybean plantings, "the overall  impact on national production is limited", the USDA said.