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Dunedin's Silver Fern Farms said 86 jobs at its Shannon fellmongery would go after the sale of the facility to Hastings-based Lowe Corporation.
The sale agreement means the Shannon plant will close and Silver Fern Farms will toll-process its North Island pelts through Lowe's Hastings facilities.
"We have been looking through a variety of options to create efficiencies in the industry and our business and this is one of them," Silver Fern Farms chief executive Keith Cooper said in a statement.
"With forecasted lower lamb numbers we believe this consolidation of pelt processing through Lowe Corp's modern facilities at Tomoana will set us both up well for the season," said Cooper, who along with others have complained about processing overcapacity in the sector.
Lowe managing director Andy Lowe said the deal showed leadership around collaboration in the sector.
"The gains we can make together out of this agreement should see a healthier sector in the long-run," he said.
The partnership between the companies to toll process pelts will bring efficiencies to the sector, despite forecast lower lamb numbers.
Lowe's Hastings facilities have the capacity to increase production and increase efficiencies.
Cooper said a support centre has been set up for the 86 people employed at Shannon, which is 15km northeast of Levin.
"While this is a positive from a business perspective, and for the industry overall, it's understandably hard on our people at the plant who worked hard, and it'll be tough on the local community," he said.
Silver Fern Farms had been bringing in the majority of the pelts to Shannon from its Takapau plant in the Hawke's Bay, to process them and then transport them back up to the Port of Napier for export.
"When operating at low efficiencies these transport costs make the plant uncompetitive," he said. "This deal takes that cost out of the equation."
Lowe Corp has plants throughout New Zealand, sourcing material from both the farming and the wider food industry.
Silver Farm Farms, a farmer co-operative, is one of the country's biggest meat processors.