The political economic structure of the South African Dairy Industry is analyzed using public choice theory. The Industry is comprised of various interest groups which are found to be interdependent. Some groups have the ability to inflict internal and external effects on other groups as a result of political power they possess. Manufacturers are the most politically effective group, having the ability to inflict external effects on other interest groups. They can spread the costs of the 'milk is milk' system among interest groups in the Industry. Their political power is mainly due to the dominant position they attained under protection of the Board before deregulation. Extensions of the public choice theory were found to be beneficial in explaining certain actions within the Industry. A gradual phasing out of regulation is recommended. Policymakers can still play an important role in providing traditional public goods and services such as information, restricting monopoly control and marketing promotions. Freedom of entry of new dairies is essential to protect the interests of consumers and producers.