Dairy producers in Colorado who bank with New Frontier Bank have been hit with a double whammy. Not only are milk prices at historic lows, but on April 10 New Frontier Bank — one of the largest agricultural lenders in the state — was taken over by the Federal Deposit Insurance Corporation (FDIC) and closed it doors.

New Frontier Bank had become one of the largest agricultural lenders in the state, providing financing for more than 30 percent of the dairy production in Colorado, with loans as far away as Texas and Florida.

If additional funding is not found, the effect could be quite dramatic, says Leland “Lee” Swenson, executive director of the Rocky Mountain Farmers Union. A domino effect has been seen already. Many dairy farmers bought hay and feed from their neighbors who have not been paid.

The potential impact goes well beyond the production of milk.

Swenson says the FDIC has encouraged borrowers to talk to other banks to see if they will take on their loans. Only a very small number of borrowers have been able to move their loans to other banks. In the last couple of weeks, FDIC officials and other financial institutions have met to assist with this process.

Meanwhile, USDA has announced the availability of $253 million in direct and guaranteed loan funds to assist producers. Swenson says the problem there is that many operations are quite large — 5,000 to 8,000 cows — and have loans from $5 million to $55 million. This creates a challenge, since the farms need loans that are significantly larger than what is allowed under current Farm Service Agency guidelines. (USDA guidelines for direct loans are $300,000 and a guaranteed loan of $1.1 million.)

It is unknown if other commercial banks will have financial resources to provide financing for the balances of the loans not covered by USDA. With the current economic crisis, banks are limited in the amount of capital they have available and are willing to give out. And, Swenson noted that most local commercial banks are not willing to take Troubled Asset Relief Program funds from the U.S. Treasury. He says there are too many restrictions on the TARP funds, and it puts the banks’ current investors and borrowers at risk.

The price of milk makes the situation even more of a challenge, says Swenson. Dairy producers are losing money every day. .

It remains to be seen if loans from New Frontier Bank will be re-packaged, discounted and sold to other banks, or what will happen to the dairies that the loans represent.

There is no simple answer to this issue. Every possibility is a double-edged sword, says Swenson.

To read more about the situation in Colorado, read "USDA pumping in $253M for Northeastern Colorado farmers after bank failure" from The Coloradoan and "Feds offer loan aid for farmers" from the Greeley Tribune.