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Archer-Daniels-Midland and Cargill make a $560 million bet on rocketing demand.

Bloomberg News

SAO PAULO - Archer-Daniels-Midland and Cargill are spearheading a push to invest about $560 million in new biofuel refineries in Brazil, a country that already has twice the capacity it needs.

The U.S. agribusinesses have joined Brazilian companies that are expanding facilities in a bet that the government will double to 10 percent the amount of biofuel that must be blended into petroleum-based diesel, driving up demand overnight.

With oil above $100 a barrel, President Dilma Rousseff is looking for alternative fuels to fill trucks' tanks and keep a lid on inflation. Expanding production would also boost the economy of Brazil's impoverished center-west region, where most of the industry is based. The risk is the country will be awash in unneeded biofuel, said Roberto Rodriguez Labastida, an analyst at Bloomberg New Energy Finance.

"There's far more biodiesel refineries online than are necessary," Rodriguez Labastida said. "I wouldn't say it's smart to invest" in any more facilities to process soybeans into fuel.

Brazil demands that diesel sold at the pump contain 5 percent biofuel. Edison Lobao, Brazil's minister of mines and energy, is considering a higher blend rate as long as there's enough vegetable oil that can be processed into fuel. He did not say how much it may be increased.

Doubling the concentration to 10 percent would rocket demand for the fuel and would cut imports of petroleum-based diesel, easing Brazil's balance of trade.

"Brazil is bound to increase the biodiesel blend to 7 percent in the next five months," said Paulo Jose Fuga, a manager at Fuga Couros. The Marau, Brazil, leather maker and meat processor is spending $13.6 million on a biodiesel plant that will process as much as 29 million gallons a year starting in February. He forecast the requirement reaching 10 percent by 2014.

Refiners, which make the fuel by treating vegetable oils or animal fats with alcohol in a chemical reaction, say they need more capacity to keep pace with rising demand for the standard diesel with which it is mixed.

Even without the blending increase, national consumption of the fuel is expected to rise by 6 percent a year over the next decade, according to a Ministry of Mines and Energy projection.

Brazil imported 9 billion liters of diesel last year, according to the secretary of external commerce.