Yes, exactly. Partly by running unprofitable farms out of business (well,out of agriculture); partly by encouraging farmers to grow crops that don't need as much water; partly by encouraging farms to watch their water use.

But the people making the decision would be people who know how much water their crops need, what the alternatives are, how profitable their crops will be in six months, etc. I simply don't have much faith in across the board cuts.

That is, I agree that water needs to be conserved. But I think there's a better approach; namely, letting the market work.