I bought a Moda scrap bag of felted wool (multi colors) at the Lil' Red Hen, Paola, KS (they are on-line) for my sis's Christmas present--she kept looking at wool every shop we went into but always thought the price was too high. Figured this was good way for her to experiment.
I've also felted my own wool from thrift shop buys--got mixed results depending on the weave and whether 100% wool.
Just checked out your pattern--weird they don't explain it as wool applique! But I'd do the applique on cotton backgrounds if I were doing it.