Smallholder farmers in rural Ethiopia are dependent on the stability of climate to fulfill their aspirations. However, the constant variability and change in climate poses additional threat to the already existing non-climatic stressors. Agriculture is largely small scale, subsistence oriented, crucially dependent on rainfall and highly subjected to adverse trends of climate variability particularly to cycles of drought, and flood. The degree of impact on households, however, varies depending the social and ecological system they live in; wealth status, age, gender, institutions in place, and other related factors. Since ‘vulnerability as experienced’ comes from the perceptions of insecurity or risk; this study focused on understanding the processes that mediate the construction of local perceptions of risk to environmental changes. Particular emphasis was given to institutional processes placed to support farmers’ food security and capacity to adapt to environmental changes. These include soil improvement and reforestation programs geared to increased agricultural productivity. Ethnographic data was collected through a combination of techniques, such as participant observation, focus group discussions, key informant interviews and oral historical accounts. In addition, structured household interviews were employed to complement the qualitative data. Preliminary results of the study indicated that institutions which are placed to improve adaptive capacity of farmers might be producing further vulnerabilities.