A field experiment located in NE Victoria compared the productivity of cereals sown into mature lucerne (companion crop) with cereals and lucerne grown as monocultures. Additional nitrogen (N) and water was applied to investigate if increased resource supply could alleviate competition and improve cereal performance in the presence of lucerne. Cereal plant populations, lucerne and cereal biomass, and cereal grain yields and protein were measured throughout the experiment. Soil water content was also monitored over time to determine whether companion cropping compromised the ability of lucerne to extract deep soil water. While companion cropping depressed both lucerne and cereal production, the combined annual biomass production was greater than cereal and lucerne when grown alone. Averaged over the three seasons, companion cropping resulted in a 31% increase (P < 0.05) in total annual biomass compared with the lucerne monoculture, and an 18% increase compared with the cereal monoculture in the 2004–05 and 2005–06 seasons. Cereals growing with lucerne produced fewer tillers, spikes and consequently cereal biomass compared with cereals growing as a monoculture. Therefore, companion crops yielded 25% less (P < 0.05) grain compared with the cereal monoculture over the 3-year study. Competition for N and light in the pre-cereal stem elongation period, were likely causes. Increasing the supply of N and water did not result in a main treatment (monoculture v. companion crop) by additional resource interaction, indicating that cereal responses were the same irrespective of lucerne’s presence. The application of N, water and these combined inputs, resulted in a 13–40%, 35% and 49% increase (P < 0.05) in cereal grain yields, respectively. While companion cropping compromised lucerne’s capacity to extract water from deep soil layers to a degree, this practice was still able to maintain drier subsoil in comparison to the cereal monoculture.