Hemp production legalized under the 2018 farm bill could go beyond offering a new crop option for farmers facing drought in Western states—it also could save them water.

Arizona, California, and New Mexico are among the states allowing hemp production in 2019 after the federal government removed the marijuana relative from its list of controlled substances. Supporters say the change comes at the right time as the region grapples with how agriculture fits into a drier future.

In California, the prospect of a crop with high cash value and lower water use is grabbing the attention of farmers, Wayne...