Fish in Bali processed in shed (7)
I believe the answer is:
halibut
'fish' is the definition.
(halibut is a kind of fish)
'bali processed in shed' is the wordplay.
'processed' indicates anagramming the letters.
'in' indicates putting letters inside.
'shed' becomes 'hut' (I've seen this before).
'bali' anagrammed gives 'alib'.
'alib' inserted into 'hut' is 'HALIBUT'.
'in' acts as a link.
(Other definitions for halibut that I've seen before include "Large flatfish used as food" , "Swimmer" , "Largest flatfish" , "One's scaled" , "Fish found in Bali hut" .)