The foreshore bank is only about 1m away from the fence - exactly what Coast Care environmentalist Lorraine Adams predicted would happen.
She has been campaigning to have the reserve made bigger.
Last month, the Waitaki Development Board built a new fence, but along the same boundary line as the existing one.
That "totally bewildered" Miss Adams, who asked why the opportunity was not taken to enlarge the reserve.
Earlier this month, she predicted the fence would soon be undercut by erosion and she has been proved right.
Recently, just 1m of land lay between the fence and the top of the bank, but by yesterday it had been undercut further.
Miss Adams felt money had been wasted and it would not be long before erosion started claiming parts of the fence.
"There is another storm predicted for this week, and I expect it will happen then," she said.
The penguins had not yet laid eggs in the boxes, but have been preparing nests.
That had been disrupted by having to shift the boxes, rather than have them disappear into the sea.
Miss Adams had been told the fence cost about $4000.
She had again raised theissue with the development board and the council through deputy mayor Gary Kircher.
Heavy seas have been eating away the reserve over the past year.
In February, penguins had to be rescued because of heavy seas.
The reserve is a control site to compare with the blue penguin colony at the Oamaru quarry, which caters to tourists.
The high wooden fence was to protect penguins from humans and predators.
Both the council and Department of Conservation, which administers the area, agreed the area would not be extended.
