Elevated atmospheric CO2 concentrations ([CO2]) are expected to increase C3 crop yield through the CO2 fertilization effect (CFE) by stimulating photosynthesis and by reducing stomatal conductance and transpiration. The latter effect is widely believed to lead to greater benefits in dry rather than wet conditions, although some recent experimental evidence challenges this view. Here we used a process-based crop model, the Agricultural Production Systems sIMulator (APSIM), to quantify the contemporary and future CFE on soybean in one of its primary production area of the US Midwest. APSIM accurately reproduced experimental data from the Soybean Free-Air CO2 Enrichment site showing that the CFE declined with increasing drought stress. This resulted from greater radiation use efficiency (RUE) and above-ground biomass production at elevated [CO2] that outpaced gains in transpiration efficiency (TE). Using an ensemble of eight climate model projections, we found that drought frequency in the US Midwest is projected to increase from once every 5 years currently to once every other year by 2050. In addition to directly driving yield loss, greater drought also significantly limited the benefit from rising [CO2]. This study provides a link between localized experiments and regional-scale modeling to highlight that increased drought frequency and severity pose a formidable challenge to maintaining soybean yield progress that is not offset by rising [CO2] as previously anticipated. Evaluating the relative sensitivity of RUE and TE to elevated [CO2] will be an important target for future modeling and experimental studies of climate change impacts and adaptation in C3 crops.