Agroforestry has gained increasing attention as a sustainable land use mode to ensure food security, mitigate global climate change, and improve farmers’ livelihoods. Likewise, agroforestry plays a key role in alleviating poverty, mitigating climate change and achieving the Sustainable Development Goals (SDGs) in China. Lanxangia tsaoko, as a typical agroforestry species in Nujiang Prefecture, plays a vital role in improving farmers’ livelihoods. After years of development, the Lanxangia tsaoko industry (LTI) in Nujiang Prefecture has made remarkable achievements and accumulated useful experiences. Taking the development of LTI as an example, this paper analyzes the impact of agroforestry on farmers’ livelihoods and its mechanism through field survey and theoretical deduction. First, by investigating the willingness of households to choose LTI, we found that most farmers have a positive attitude toward LTI, and they actively participate in cooperative organizations. Then, by analyzing the development stage and mode of LTI in Nujiang Prefecture, we found that the industry has made significant progress under the external and internal effects. We also found that the mechanism by which agroforestry affects farmers’ livelihoods is a process in which various stakeholders, including government, enterprises, farmers, etc., participate in industrial development with their production components and advantages. Although agroforestry is an effective way to improve farmers’ livelihoods and promote sustainable agricultural development, it is also necessary to pay attention to risk prevention. This paper discusses the role of agroforestry in farmers’ livelihoods, which provides a reference for lower-income forest areas.