Climate variability poses a major challenge to smallholder farmers who depend on rain-fed agriculture, with significant implications for cereal crop production and rural livelihoods. Although numerous studies have examined climate trends and agricultural impacts, limited research has integrated climate variability, crop yield responses, farmers’ perceptions, and adaptation strategies within a single watershed-scale framework across different agroecological zones. This study aimed to evaluate historical and future climate trends, assess the impacts of climate variability on cereal crop yields, examine farmers’ perceptions of climate-related risks, and identify the factors influencing adaptation strategies in the Ayehu watershed, Upper Blue Nile Basin, Ethiopia. A mixed methods approach was employed, combining climate data analysis, crop yield assessment, household surveys, key informant interviews, focus group discussions, and econometric modeling. Historical climate analysis revealed a slight but statistically insignificant decline in annual rainfall, accompanied by declining Belg rainfall, increasing Kiremit rainfall, and significant warming trends in both minimum and maximum temperatures. Future climate projections indicated continued increases in temperature under all emission scenarios, while rainfall projections showed mixed patterns, with some scenarios suggesting increases in rainfall amounts and variability. The results further showed that climate variability significantly influences cereal crop production. While rising minimum temperatures were associated with improved crop yields, rainfall variability and irregular rainfall distribution negatively affected production, highlighting the sensitivity of cereal crops to changing rainfall patterns. Farmers’ perceptions generally corresponded with observed climatic trends, although significant differences were evident across agroecological zones. Drought, water scarcity, pest outbreaks, and declining crop yields were identified as the major climate-related risks. Farmers employed a combination of indigenous and introduced adaptation strategies, including crop diversification, local crop varieties, adjusted planting dates, and improved agricultural inputs. Adaptation decisions were significantly influenced by education, access to credit, extension services, climate information, agroecological conditions, and household income, whereas small landholdings, soil degradation, limited irrigation access, and high input costs constrained adaptation efforts. The study makes a novel contribution by integrating climate science, crop yield analysis, farmers’ perceptions, and adaptation behavior within a single watershed-scale framework. It further advances understanding through agroecological comparisons and the incorporation of CMIP6- based future climate projections, enabling a comprehensive assessment of both current and future climate risks. By linking observed climatic changes with farmers’ perceptions and adaptation decisions, the study provides context-specific evidence on how climate variability influences agricultural production and livelihood resilience. Overall, the findings highlight increasing climate risks in the Ayehu watershed and underscore the need for targeted, climate-smart interventions that strengthen adaptive capacity, enhance cereal production, and support sustainable rural livelihoods.