That looks like what's sometimes called "sub stuffing" (or substitute stuffing), which was just a way to use scraps from the manufacture of clothing and save a bit of money. I believe it was a common practice during WWII, when materials were scarce, and it may have continued into the 1950s. (That's my guess as to the sheep's age, and the black "wool" could be rayon, which is the opposite of fire retardant, so you might want to keep the toy away from young children.)
I know this is a very old post now, but I just thought I'd reply as other people may be interested.
I was recently asked to restore a very dirty and dilapidated doll, when I took it apart it was stuffed with the same material as shown above. I believe my doll dates from the late 50's to early 60's and was made in the UK by Chad Valley. I had never seen that kind of filling before so I made some enquiries and was told it is 'mill waste'. The woollen and cotton mills collected every scrap of waste fabric and fibres and sold it on for lots of purposes, one being to stuff toys. My toy had been stuffed really really firmly just like an old wood-wool bear. When I re-stuffed it I used heavy polyester chopped up with wood-wool. It gave an excellent result.