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

A new partnership with Kraft Foods (NYSE: KFT) could prove lucrative for TerracCycle, the rapidly growing “upcycler” known for using landfill-bound waste as the raw material for totebags and other containers.

To collect the yogurt containers, wine corks, energy bar wrappers, soda bottles and other raw materials, the Trenton-based company provides a free collection service to any individual or company that signs up online. Terracycle provides participants with pre-paid mailers, for sending the collected materials to New Jersey. TerraCycle then pays participants  2 cents per item, which participants must donate 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 incorporate energy bar wrappers, cookie wrappers and drink pouches as the raw materials for lines of bags and pencil cases. The sponsorship is worth enough to pay the costs of TerraCycle’s raw materials, according to Zakes.

TerraCycle, which was started in 2001 by a Princeton University student who dropped out to run the business, projects sales will reach $7.5 million this year, up from $3.3 million in 2007. The company currently offer 25 products on its Web site and in Target (NYSE: TGT), OfficeMax (NYSE: OMX) and Walgreens (NYSE: WAG) stores. By 2009, 50 TerraCycle products will be on shelves in Wal-Mart (NYSE: WMT) stores, according to Zakes. CVS (NYSE: CVS) and RiteAid (NYSE: RAD) are also considering working with TerraCycle.

TerraCycle’s three-year partnership with Kraft could significantly boost the amount of materials TerraCycle can reuse, as Kraft is collecting wrappers—tnone of which can be recycled, according to Zakes—tin some of its corporate locations as well as in schools where it runs food services. The program could eventually reach as many as 20,000 schools and upcycle as many as 1 billion drink pouches by 2010, Zakes says.