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The purpose of this paper is to analyse farmers' contracting choice in the Hungarian milk sector, employing transaction cost economics framework.

The authors focus on some key determinants of farmers' contracting choices using milk producer survey data. Different semi parametric and semi non parametric discrete choice models are applied to investigate the type of contracts, duration, number of contractors, incentives provided in the contract and business history of farmers and buyers.

Main results confirm that contract‐specific investment is a strong predictor explaining contract choice and contract design. Although trust is an important factor, the authors' estimations however report some counterintuitive results. Farm size is also significantly associated with contracts and contractual arrangements. Vulnerability to opportunistic behaviour also depends on partner change switching costs and farmers' bargaining power.

This is a recent study that investigates the role of contracts between producers and processors, significantly contributing to the limited literature on contractual relationships in transition agricultures.