Use on sheep to get wool, use wool on spinning wheel to get ball of wool. Required in the infamous "Sheep shearer" quest.
The sheep you are shearing may get away while you try to get its wool, resulting in not obtaining its wool. Only sheep with a big, fluffy coat of wool can be sheared, once a sheep is sheared it will lose its fluffiness until it grows back minutes later. Use on on spinning wheel to get ball of wool for stringing amulets.