The point is that subsidies should not be proportional to water use, but to food production. Otherwise there is little incentive to make more efficient use of water, and that leads to farmers planting crops that sell at a higher price but require disproportionally more water.

It's an extremely important point when you consider the water going to things like almonds in California, the majority of which are then exported. Their almond crop alone consumes enough water to supply Los Angeles and San Francisco combined. Only 20% of California water is for non-agricultural purposes.

Or put another way, the total economic value of all exported almonds from California is about $3.5 to $4 billion. The water use is about on par with the entire city of Los Angeles for that almond export crop. The metro area of LA has a trillion dollar economy by comparison (250+ fold larger than the almond exports). That's an economically irrational imbalance.

The obvious question becomes: is that what California wants to do with its scarce water resources, export large parts of it at an extremely low value basis? At some point in the near future it's likely some hard choices will need to be made, including whether to invest extremely large sums of money into more desalination plants or to begin restricting the most voracious water consumers (cattle are another one, although I'm unsure of their export ratios).

From a free market perspective, I would think it to be more efficient to directly subsidize farmers, ie, with generous tax credits, than to subsidize water.

Then you get to subsidize food but still have an efficient allocation of water.

Farmers might be more incentivized to grow crops with less water requirements but more food value.