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Brazil raises biodiesel requirement in diesel blend

(Adds officials' comments on blend increase, paragraphs 1-4; background, paragraphs 11-12)

By Jeferson Ribeiro

BRASILIA, May 28 (Reuters) - Brazil will increase the amount of biodiesel that must be blended into diesel to 6 percent in July and to 7 percent in November from the current 5 percent, Mines and Energy Minister Edison Lobao said on Wednesday.

The increase is aimed at replacing Brazil's diesel fuel imports with more domestically produced biodiesel that uses oils from soybeans and animal fats such as beef tallow as feedstock.

"The increase in the biodiesel blend will allow Brazil to substitute the import of 1.2 billion liters (264 million U.S. gallons) of diesel a year," Lobao said at an event in Brasilia.

Brazil will also set up a band for the minimum biodiesel requirement to be added to diesel that will range between 5 and 7 percent and vary according to economic conditions, like a similar band for blending ethanol into gasoline, the biofuels coordinator at the Agricultural Development Ministry, André Machado, told Reuters.

Changing the blend requirement for biodiesel has been on the table for years but faced resistance from the Finance Ministry, which has struggled to keep inflation within the central bank's target range ahead of the presidential election in October.

Opponents feared using more soy to make fuel could raise the price of the commodity and affect Brazil's consumer price index. According to the Brazilian Association of Vegetable Oil Industries, however, recent studies have shown that the impact of biodiesel on inflation is negligible.

The government's diesel blend announcement will also be good news for state-run oil firm Petroleo Brasileiro SA , which has been forced by government policies to import diesel fuel and sell it at a loss.

That has contributed to a surging debt load for Petrobras as the company is known. Brazil uses more diesel than gasoline and has domestic refining constraints in both fuels.

With a 7 percent biodiesel blend requirement, biodiesel consumption in Brazil could rise to 4.2 billion liters a year from the current 3 billion liters. In 2015, Brazil could replace 10 percent of the volume of its diesel demand with domestic biodiesel, according to industry data.

Large agribusiness firms such as Cargill Inc and Bunge Ltd have opened biodiesel plants in Brazil in recent years because of an expected spike in demand.

The biodiesel industry in Brazil, which includes Petrobras and multinational grain crushers such as ADM, Bunge and Cargill, is producing the fuel at only 60 percent to 65 percent of its potential capacity, which prompted the closure of plants in the past year.

Brazil also pioneered the production of another biofuel, ethanol from sugarcane, and the cane industry has petitioned the government to raise the minimum amount of ethanol in gasoline to 27.5 percent from 25 percent this year.

(Reporting by Jeferson Ribeiro; Editing by Franklin Paul and W Simon)