Smallholder crop commercialization, a key strategy for rural poverty alleviation in Sub-Saharan Africa, hinges on effective value chains linking farmers to markets for inputs and outputs. Despite its potential, it faces considerable investment risks, notably from climate variability and shocks. Agricultural commercialization dynamics under changing climate remain largely underexplored in extant literature. This study examined how climate risk and socioeconomic factors shape commercialization decisions among smallholders in rural Ethiopia. Using nationally representative longitudinal household panel data spanning 2012–2019 and historical climate data from 1980–2018, it assessed the influence of climate variability and shocks on crop output market participation decisions. Appropriate latent variable models within a correlated random effects framework were employed to address potential endogeneity issues associated with output market participation decisions emanating from both observed and unobservable household heterogeneity. The findings indicated that recurrent climate variability and shocks significantly and negatively affected crop output commercialization decisions. Moreover, ex ante investments in commercial inputs enhanced farmers’ resilience and sustained market participation amid climate stress. Strategies to enhance smallholder value chains must prioritize climate risk management to safeguard production and sustain commercialization.