I was going to post this as a response to Pombat's questions and to LTG's passionate defense of farmers in California against the market and nature. But there were so many good links that I found that I thought I would just start a new post.
I won't reprise my basic arguments in detail. If you are interested you can see the comment stream on LTG's thread about "Rain Rain Went Away." There is also this excellent Q&A with an economist about agricultural subsidies here. His short answer to "Are there any good reasons to have agriculture subsidies?" is "No."
Also, Pombat raised several good points. How much of the water is being used by farmers as opposed to cities. According to this link, the national proportion in the USA is that farmers use 75% of the water and everyone uses the rest. According to this story in the SF Chronicle, California farmers use 80% of the water so they are relatively thirstier than the national average.
That first link also points out that pricing is the critical problem. Farmers everywhere pay about $20/acre foot of water. Residential consumers pay $1000/acre foot. This is what I was alluding to when I said that California farmers have less incentive to select less thirsty crops, more efficient crop rotations or take other steps to conserve water. Indeed, the story in the SF Chronicle includes some rather defensive statements from California agribusiness lobbyists opposing improving the efficiency of the irrigation system in the Central Valley. Instead, they want the taxpayers to build more dams up in the mountains to increase storage capacity.
This is now in the realm of basic economics. When you have people arguably paying about 2% of the market price for a commodity they will over consume it and this will lead to shortages. The reason this is a bigger problem in California than in places like Iowa is not because of some snobbishness on my part. Rather it is because, in Iowa, farmers get their water from natural rain fall and ground water pumped up locally with small scale windmills and powered wells. In California the farmers get the overwhelming majority of their water from publicly funded irrigations projects that bring water from melting snow packs many miles away or divert rivers. For this water the California farmers are paying 2% of the market price.
So we have a region where farmers are dependent on government funded irrigation for the overwhelming majority of their water. They only pay a minute fraction of the cost for that water. Is it surprising that they over use it? That they have developed too many farms on marginal land?
And how have these poor suffering farmers thanked their urban benefactors? They rail against racial minorities, push racist policies designed to keep Latinos poor and exploitable, provide the core of the votes for Prop 8, Prop 13, and others. And their representatives veto budgets for months until the state is in a nearly perpetual fiscal crisis. We're talking about a part of the state that is so political anti-progressive that the term "Calibama" fits all too well. And they're completely dependent on cash payouts in the form of nearly free water for their ability to do all this.
This is system is extremely vulnerable. As the available supply decreased relative to farming demand, the price should have gone up - thus discouraging additional development. But instead, California's farmers were carried "on the cuff" so to speak by the taxpayers. So when we have a temporary - although with global climate change this drought may be increasingly common - shock, the effect is enormous. I'm sorry but given the political economy of this whole situation I won't be shedding too many tears for the Central Valley on this one.
BTW: Australia has no ag subsidies. GOOD ON YA! I do have a question for Pombat and Spotted Handfish...do you guys know if Australian farmers pay market rates for their water?