This is very much true in NM where I live. Agriculture accounts for 79% of yearly water use. We're known for our chile (63,000 tons) but that's dwarfed by alfalfa (784,000 tons).

I'm not sure what the answer is. The farmers have their own water rights, and as a group are pretty well politically connected.

We could try Eminent Domain or unilaterally breaking those old water contracts... but that's guaranteed to make the Supreme Court. Given the current make up of the SC, I don't see any decision coming that might curtail property rights. I'm guessing it'll be perpetual subsidies for letting land go fallow.