Fonterra says many farms are inaccessible and milk collection impacted by flooding in Southland and Otago.
He says the fastest way to insulate the dairy industry during commodity price fluctuations is by making more value added products.
Speaking to Rural News after opening the global food processing company Tetra Pak's new head office at Waikato Innovation Park, Key said the Government is always talking to Fonterra about its product mix.
"I don't think there is unwillingness or non-understanding by Fonterra that they need to continue to move up the value curve," he says.
"They face all sorts of issues – trade barriers and under DIRA they had to take a lot of milk in a certain time. But they are moving as best they can; they are investing in value added products and there's lots more to be done."
For its part, Keys says the Government is putting money into primary growth partnership (PGP) incentives and science and innovation projects.
In his speech Key thanked Tetra Pak for investing in New Zealand and alluded to the company's history of innovation and creativity.
"That's what NZ has to do," he says. "It's great that NZ produces a lot of milk powder but there is a need to move more into UHT milk and infant formula.
"Fonterra and other companies are working very hard to move up the value chain," Key says. "The future of NZ lies in adding value to our milk and getting more for our farmers."
Key points out that the Government cannot control the exchange rate, weather and international commodity prices.
"I wish we could, but unfortunately we can't. So on that basis, the fastest way to insulate our way through [downturns] is to make sure we are higher up the value chain, so we are less impacted when [downturns] happen."
Tetra Pak's market area leader for NZ, Chris Morgan, endorsed Key's comments.
"The current dairy downturn re-emphasises the need for NZ's export businesses to hasten their diversification out of commodities into value-added products," says Morgan.
"While this is well understood by the key players, the time to market needs to be accelerated. Tetra Pak has the portfolio, the people and the required capabilities to support our customers in this endeavour."
Waikato Innovation Park chief executive Stuart Gordon says Tetra Pak is a perfect match with the park.
"We are proud to have a multi-national company that is a world leader in food processing and packaging in the Waikato Innovation Park, forming an important part of the agri-business cluster."
Help, but no handouts
Prime Minister John Key says the Government is doing everything it can to assist dairy farmers facing their second season of low milk prices.
But Key is ruling out subsidies.
"We acknowledge the difficulties they are facing; we are doing everything we can to assist them," he told Rural News.
"Clearly it's not possible for us to subsidise farmers, but we are working with banks; we are also making sure we are not putting any excess costs on them."