The prospect of unprecedented environmental change, combined with increasing demand on limited resources, demands adaptive responses at multiple levels. In this article, we analyze different attributes of farm-level capacity in central Arizona, USA, in relation to farmers' responses to recent dynamism in commodity and land markets, and the institutional and social contexts of farmers' water and production portfolios. Irrigated agriculture is at the heart of the history and identity of the American Southwest, although the future of agriculture is now threatened by the prospect of ''mega-droughts,'' urbanization and associated inter-sector and inter-state competition over water in an era of climatic change. We use farm-level survey data, supplemented by in-depth interviews, to explore the cross-level dimensions of capacity in the agriculture-urban nexus of central Arizona. The surveyed farmers demonstrate an interest in learning, capacity for adaptive management and risk-taking attitudes consistent with emerging theory of capacity for land use and livelihood transformation. However, many respondents perceive their self-efficacy in the face of future climatic and hydrological change as uncertain. Our study suggests that the components of transformational capacity will necessarily need to go beyond the objective resources and cognitive capacities of individuals to incorporate ''linking'' capacities: the political and social attributes necessary for collective strategy formation to shape choice and opportunity in the future.