Farmer-induced collective action (co-operatives) or buyer-driven contracts are often in place in global agrifood chains. Their economic contribution is well recognised, although the exclusion of smallholders remains. This paper pays particular attention to the impact of co-operatives and contracts on dairy production and the income of dairy farmers in the local food chains in Northern Ethiopia. A structured survey of 415 dairy farmers was undertaken in four districts of Northern Ethiopia. Propensity score matching, regression on observables and regression on propensity scores were implemented to control selection bias. Both models yielded consistent treatment effect estimates, implying that milk production, cow productivity and household income for the members of co-operatives are larger in contrast to dairy farmers employing the spot market. We suggest that strengthening co-operatives may enhance and upgrade the dairy sector/chain, improve the livelihoods of smallholders, and facilitate the link to global food chains.