The uncertainty of water availability is the main problem in planning for water resources in watersheds of agricultural drylands. Water availability for different uses depends on the runoff that is generated in the upper portion of the watersheds, where there are higher elevations and lower temperatures. Proximity to the ocean is a main factor that defines rainfall amounts. In this research we linked the effects of El Niño to a regional Standardized Precipitation Index (SPI) and the subsequent impact on runoff production and irrigation water allocation. Findings indicate the cascading impacts of the El Niño on the SPI, the SPI on the runoff discharge to the irrigation reservoir, and the final impact on the planted area within the irrigation district. An optimization procedure was applied to maximizing net income in agriculture under different water availability scenarios. The restrictions to the optimization model were: total available water, crop water demand, and available land. Local criteria for defining the maximum allowable planted area by crop also were taken into account. The analysis with various water availability scenarios demonstrated that with limited amounts of water for irrigation, forage area would be limited, thereby increasing the area of crops with lower water demands. In both scenarios the area of forage maize was reduced from 11 300 to 1 764 ha. Increasing irrigation water use efficiency may save water for expanding the irrigated area, or for other uses.