Countries still confronted with transition process express different patterns of contractual arrangements in the agricultural sector. The inefficiencies in their legal systems and problems with contracts enforcement in many instances force informal contracting arrangements instead. This paper empirically tests the transaction cost specifics determining the presence or absence of contracts to regulate transactions between the dairy farmers and their processing partners in the Former Yugoslav Republic of Macedonia (FYROM). In order to stimulate investments and initiate progress in this sector, it is necessary to establish tighter coordination trough long-term formal contracts which will eliminate the present uncertainties and risks.