This study aims at characterizing agricultural drought in Ethiopia and understanding the effects of drought on crop yield. Monthly, seasonal and annual Normalized Difference Vegetation Index (NDVI) and Vegetation Condition Index (VCI) values were calculated using MODIS (MOD13Q1) from the year 2003 to 2017. The relationships between NDVI, VCI, and crop yield were examined to predict the possibility of drought impacts on crop productivity. We found that VCI and NDVI data provides consistent and spatially explicit information for operational drought monitoring in Ethiopia. Results also indicated that the most extreme agricultural drought in recent years occurred in 2003, 2004, 2008, 2009, and 2015. These findings also show that mild to severe droughts have a great chance of occurrence in Ethiopia. However, only severe drought has significant impacts on crops. The food crops yield data used in this study include cereals, legumes, and tubers. It was observed that cereals such as (Zea mays), teff (Eragrostis tef), haricot beans (Phaseolus vulgaris) are more sensitive to agricultural drought when compared to the tubers such as sweet potato (Ipomoea batatas) and taro (Colocasia esculenta). Thus, drought preparedness programs need to pay more attention to the cultivation of these crops under severe drought conditions.