You can definitely do wool applique on a cotton or flannel background. An all wool background would be very expensive if you're doing a larger piece. There are a couple of lines of cottons that are made to look like wool: Maywood has Woolies and Primitive Gatherings does one called Wool and Needle Flannels. When you look at them they look like wool but they are flannels which definitely reduce the cost. For me, though, I like the look of a cotton background. I think it helps give added dimension to the wool.