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Abstract
This paper discusses the reasons for and effects of the dramatic expansion of chat production as a cash crop in the Hararghe Highlands of Ethiopia. Despite the Ministry of Agriculture's deliberate attempt to discourage chat production, farmers continue to shift their scarce resources into chat production. Using data generated by a rural livelihood survey from 197 randomly selected households, economic and non-economic factors contributing to the expansion of chat production are identified and its food and nutritional security impact analysed. The case study confirms once more the power of market incentives in encouraging agricultural activity of peasant farmers even in the absence of functional research and extension systems. The case study shows that households producing chat have good food security status and thus the situation presents a policy dilemma: Should the government promote or discourage chat production?