The rural economy of the Former Yugoslav Republic of Macedonia has been adapting to new economic and political realities. Especially important for rural areas has been the breakdown of the socialist market structure in agriculture, which meant the demise of cooperative structures and farmers gaining access to new market outlets. The aim of this paper is to investigate the potential of dairy sheep farmers to enter into new contracts with buyers and to analyze why some farmers continue selling to traditional market outlets. Using survey data of dairy sheep farmers we studied the choice they make between 3 market outlets: (1) selling milk to a recently established large dairy processor, (2) selling milk to traditional small local processors, or (3) transforming milk on-farm into cheese and selling it at the farm gate or at local markets. The significance of determinants of choice for these markets were tested in a multinomial logit model, which showed that distance to the collection point of the large dairy processor was the most important determinant of whether farmers sold milk or made cheese, with those at a greater distance selling cheese. Furthermore, we analyzed the main sources of transaction costs in developing new market channels. Overcoming transport and transaction costs may contribute to higher income for the farmers and hence to improving their livelihoods.