Shredded Paper
 
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Shredded paper makes a pretty good packing material for items that aren't very heavy. The ink in it can cause soiling (if the shreds were made from newspaper) but it does offer reasonable protection.  It has some liquid absorption capacity so it makes a reasonable packing material for bottles of liquid.
 
There exists a commercial system for producing twisted, shredded paper from rolls of kraft paper.  Packing produced this way is a lot more expensive than peanuts, but it will meet the requirements of customers who require biodegradable packing.

An important problem with shredded paper is that it is very dense (ie heavy) . You can easily add 5 pounds to the weight of a packing box.    The extra shipping costs can negate savings offered by "free packing material".  If you use it for packing for shipping, consider using it only for nearby shipments.
 
 

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