Up to 2,900 gallons of water are used to produce an ordinary pair of jeans, according to the Environmental Protection Agency. Agave's Shafer said one way the industry is cutting back on water is using an ozone process for jeans, which is considered "an eco-friendly process, as opposed to bleach." Moreover, Shafer said companies are incorporating recycled cotton and polyester materials into fabrics, as well as blending with Lyocell, a form of rayon that is created with wood pulp.
The USDA forecasts California's Pima production will drop to 155,000 acres this season, down 26 percent from 210,000 acres a year ago. That would represent the lowest California cotton acreage since 1932.
Read MoreTo beat drought, Santa Barbara tries tapping the Pacific
"It's a matter of limited water we have and where we put it," said Mark Watte, who farms cotton, almonds and other crops in California's drought-stricken San Joaquin Valley. "Cotton is quite a ways down in the pecking order. Our tree crops is where the water goes first."
Watte cut his cotton acreage this year by about 50 percent to 500 acres, meaning it will account for just one-sixth of the family farm's total acreage. The farm has historically had 60 percent of the acres growing cotton.
"Last year we were able to cobble together water and limped to the finish line," said Watte. "This year we will have significant acreage that will not be farmed in the summer."