To develop a suitable method for monitoring wheat yield loss caused by drought for dry farming areas in northwestern China, daily ET0 and ETC were calculated using KC and FAO- PM from 1961 to 2000, and wheat evapotranspiration with an interval of 10 days was estimated with soil water balance equation for the mountainous areas in southern Ningxia, China. Actual water consumption and water requirements of wheat during growing season was calculated using soil water balance equation by correcting leakage of soil water and run-off of precipitation every year. A model for estimation of yield loss by drought was established based on crop growth-water consumption function and yield potential. The results show that it is an effective method for monitoring drought and estimating yield loss. This method is suitable for monitoring drought and estimating yield loss of wheat in dry farming areas in northwestern China. To develop a suitable method for monitoring wheat yield loss caused by drought for dry farming areas in northwestern China, daily ET0 and ETC were calculated using KC and FAO-PM from 1961 to 2000, and wheat evapotranspiration with an interval of 10 days was estimated with Soil water balance equation for the mountainous areas in southern Ningxia, China. Actual water consumption and water requirements of wheat during growing season was calculated using soil water balance equation by correcting leakage of soil water and run-off of precipitation every year. A model for estimation of yield loss by drought was established based on crop growth-water consumption function and yield potential. The results show that it is an effective method for monitoring drought and estimating yield loss. This method is suitable for monitoring drought and estimating yield loss of wheat in dry farming areas in northwestern China.