This study examined how agriculture in six southwestern states might adapt to large reductions in water supplies, using the U.S. Agricultural Resource Model (USARM), a multiregion, multicommodity agricultural sector model. In the simulation, irrigation water supplies were reduced 25% in five Southern Mountain (SM) states and by 5% in California. USARM results were compared to those from a "rationing" model, which assumes no input substitution or changes in water use intensity, relying on land fallowing as the only means of adapting to water scarcity. The rationing model also ignores changes in output prices. Results quantify the importance of economic adjustment mechanisms and changes in output prices. Under the rationing model, SM irrigators lose $65 in net income. Compared to this price exogenous, "land-fallowing only" response, allowing irrigators to change cropping patterns, practice deficit irrigation, and adjust use of other inputs reduced irrigator costs of water shortages to $22 million. Allowing irrigators to pass on price increases to purchasers reduced income losses further, to $15 million. Higher crop prices from reduced production imposed direct losses of $130 million on first purchasers of crops, which include livestock and dairy producers, and cotton gins. SM agriculture, as a whole, was resilient to the water supply shock, with production of high value specialty crops along the Lower Colorado River little affected. Particular crops were vulnerable however. Cotton production and net returns fell substantially, while reductions in water devoted to alfalfa accounted for 57% of regional water reduction.
