Terracycle will market a number of tote bags using Capri Sun drink pouches as the raw material.

A new partnership between "upcycler" Terracyle and Kraft Foods (NYSE:KFT) could lead to a reduction in the amount of packaging that ends up in the nation’s landfills. It might also drive Terracycle to profitability by the end of the year.

Terracycle produces consumer good such as tote bags and other containers using packaging from disposable items as its raw material. To collect the yogurt containers, wine corks, energy bar wrappers, soda bottles and other raw materials, the company lets any individual or company sign up online for free to set up a collection station. Participants use pre-paid mailers provided by the company to send the collected materials and receives 2 for each item. Terracycle requires the money be donated to either a school or a nonprofit organization.

Albe Zakes, Terracycle’s director of public relations, declined to say how much Kraft is paying to sponsor three lines of products that will use energy bar wrappers, cookie wrappers and drink pouches as the raw materials for lines of bags and pencil cases. He did say the sponsorship is large enough to pay the costs of Terracycle’s raw materials.

Terracycle, which was started in 2001 by a student at Princeton University who then dropped out to run it, had $3.3 million in sales last year and projects sales will reach $7.5 million this year. They currently offer 25 products on its Web site and in Target (NYSE: TGT), Office Max (NYSE: OMX) and Walgreens (NYSE: WAG) stores. By 2009, Zakes says 50 Terracycle products will be on shelves in Wal-Mart (NYSE: WMT) stores. The company has interest from CVS (NYSE: CVS) and Rite-Aid (NYSE: RAD) in some of its products.

The three-year partnership with Kraft has the potential to increase the amount of materials Terracycle can re-use because Kraft is collecting wrappers--none of which can be recycled, according to Zakes--in some of its corporate locations as well as in some of the schools where it runs food services. Zakes says Kraft has expressed interest in bringing the program to as many as 20,000 schools and upcycling as many as 1 billion drink pouches by 2010.