Spot markets sometimes fail to govern the whole or part of the marketing channel effectively, and contractual relations are gaining more importance. This applies especially to agricultural markets, which have become more differentiated, while market players are vulnerable in most cases. The aims of our research are to present a theoretically structured framework for the contracting arrangements of milk producers, based on Transaction Cost Economics predictions and an empirical analysis of the key determinants of governance structure between farmers and dairy processors in Hungary. The source of the research is a theoretical argument based partly on a review of Hungarian and international literature on relevant market channels, and the economics of contracting and governance structures. These give theoretical determinants of testable prepositions. A postal survey of milk producers was carried out in the second quarter of 2005. Altogether 300 questionnaires containing closed and open questions were sent out to milk producers, and 68 responses could be evaluated. The results were structured and electronically converted for SPSS software. The data was analysed by multivariate techniques (cluster analysis, linear regression, multidimensional scaling, etc). The seven hypotheses were grouped into three sections: those related to governance structure, contract features, and bargaining power/cooperation. The findings from the empirical research were that two of the hypotheses had to be rejected and all the others accepted.