While linking smallholder farmer to dairy value chain industry has identified as a potential pathway to get out of poverty trap by raising incomes and by increasing the availability of nutrient-dense foods in Ethiopia, much less is known about the poverty implication of smallholder participation in dairy value chain. We assess nutrition impacts of smallholder farmers' participation in the formal milk value chain with cross sectional survey data from Ethiopia. To assess smallholder farmer households' food and nutrition security outcomes, we employed multiple food access measurements such as per capita dietary energy intake, food consumption score, and household income. We use propensity score matching model to analyze impact pathways. The results show that as compared to households without participation, households with participation have higher dietary energy intake, dietary diversity, and household income. However, there is a negative association between participation in the milk value chain and level of milk consumption. We find that smallholder farmer participation in milk value chain has a positive significant effect on food sufficiency, dietary diversity and income. This study, therefore, confirms the potential role of smallholder farmers' participation in agri-food value chain to get out of poverty trap through improving rural household income, food security and nutrition.