As economies develop and societies change, emerging sets of challenges are placed on water resources and its governance. Population growth and economic development tend to drive the demand for more water, and push river basins into situations of scarcity. Agriculture, globally the largest user of water, is a major driver of water scarcity, and also the sector that has to bear the consequences of scarcity. Yet governance arrangements the world over have difficulty coming to grips with the management of agricultural water within the larger water resource context. The four major agricultural water governance challenges are: to manage transitions from abundance to scarcity; to deal with the large informal sectors of the agricultural water economy; to adapt to the changing objectives of society; and within each of these challenges, to craft context-specific solutions. This paper presents examples of these challenges and uses them to derive a conceptual framework to help us understand present agricultural water-use contexts, and to develop context specific solutions. The framework is based on two important and shifting contextual dimensions: the degree of scarcity within a basin, and the degree of formality in water use. Looking at agricultural water governance within this framework shows that some standard prescriptions for water problems may not always he appropriate and that 'second best' solutions can in fact be the best way forward. The challenge for governance is to facilitate the development of these solutions.