Increasing crop yield and water use efficiency (WUE) in dryland farming requires a quantitative understanding of relationships between crop yield and the water balance over many years. Here, we report on a long-term dryland monitoring site at the Loess Plateau, Shanxi, China, where winter wheat was grown for 30 consecutive years and soil water content (0-200 cm) was measured every 10 days. The monitoring data were used to calibrate the AquaCrop model and then to analyse the components of the water balance. There was a strong positive relationship between total available water and mean cereal yield. However, only one-third of the available water was actually used by the winter wheat for crop transpiration. The remaining two-thirds were lost by soil evaporation, of which 40 and 60% was lost during the growing and fallow seasons, respectively. Wheat yields ranged from 0.6 to 3.9 ton/ha and WUE from 0.3 to 0.9 kg/m(3). Results of model experiments suggest that minimizing soil evaporation via straw mulch or plastic film covers could potentially double wheat yields and WUE. We conclude that the relatively low wheat yields and low WUE were mainly related to (i) limited rainfall, (ii) low soil water storage during fallow season due to large soil evaporation, and (iii) poor synchronisation of the wheat growing season to the rain season. The model experiments suggest significant potential for increased yields and WUE.