Most rural households in Ethiopia produce for subsistence and the level of production is not sufficient to fulfil their needs due to poor production of the rainfed farming. The use of productivity enhancing inputs in the rainfed agriculture is also at low level. Particularly, in the drylands of northern Ethiopia, the risk of crop failure makes farmers reluctant to apply productivity-enhancing inputs such as fertiliser and improved seeds. Such yield risk can be reduced by soil and water conservation practices as well as by development of water management techniques. A concerted effort is being made to alleviate the precarious food shortage and poverty situation in Ethiopia by focusing on agriculture productivity through measures that combine land conservation and water management.
However, markets for land and water in Ethiopia are poorly developed due to policy restrictions on free transaction of land and water resources. This may discourage investment in improving and maintaining conservation and irrigation structures, and efficient utilization of scarce irrigation water and irrigable land. In the absence of well-developed markets, communities commonly practice short-duration contracts arrangements. A wide range of contract forms are practised world-wide such as fixed rental, sharecropping and wage labour (Ellis, 1993). Contract systems to be sustainable should lead to better efficiency in resource use in both the short- and long- term and contribute towards poverty reduction (Tesfay, 2006).