This article examines smallholders’ perceptions of climate variability in two districts in northern Ethiopia, and the diversification options pursued within and outside agriculture. Meteorological records corroborate smallholders’ belief that temperatures are increasing but do not support assertions that rainfall is decreasing. Farm‐level adaptation mainly involves soil and water conservation measures learnt from state‐led schemes as well as planting a broader crop mix. Diversification outside agriculture is mainly wage labour: international and national migration, construction work in local towns, participation in public works and piecework on nearby farms. The article concludes by arguing that policymakers could do more to support non‐farm diversification strategies by recognising the importance of rural–urban connections in fostering adaptation.