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Characterization of drought environment types (ETs) has proven useful for breeding crops for drought-prone regions. Here, we consider how changes in climate and atmospheric carbon dioxide (CO2 ) concentrations will affect drought ET frequencies in sorghum and wheat systems of northeast Australia. We also modify APSIM (the Agricultural Production Systems Simulator) to incorporate extreme heat effects on grain number and weight, and then evaluate changes in the occurrence of heat-induced yield losses of more than 10%, as well as the co-occurrence of drought and heat. More than six million simulations spanning representative locations, soil types, management systems, and 33 climate projections led to three key findings. First, the projected frequency of drought decreased slightly for most climate projections for both sorghum and wheat, but for different reasons. In sorghum, warming exacerbated drought stresses by raising the atmospheric vapor pressure deficit and reducing transpiration efficiency (TE), but an increase in TE due to elevated CO2 more than offset these effects. In wheat, warming reduced drought stress during spring by hastening development through winter and reducing exposure to terminal drought. Elevated CO2 increased TE but also raised radiation-use efficiency and overall growth rates and water use, thereby offsetting much of the drought reduction from warming. Second, adding explicit effects of heat on grain number and grain size often switched projected yield impacts from positive to negative. Finally, although average yield losses associated with drought will remain generally higher than that for heat stress for the next half century, the relative importance of heat is steadily growing. This trend, as well as the likely high degree of genetic variability in heat tolerance, suggests that more emphasis on heat tolerance is warranted in breeding programs. At the same time, work on drought tolerance should continue with an emphasis on drought that co-occurs with extreme heat., (© 2015 John Wiley & Sons Ltd.)