Yes, if you are using wool, it needs to be felted. Wash it in hot water and dry it in the dryer to felt it. If you do not have local access to wool, there are many websites that sell it. These are two of my favorites.
http://www.thewoolbasket.com/
http://www.suespargo.com/fabricWOOL.html
I looked at your pattern. It is really cute. Fabric "requirements" for quilts are just suggestions. You have the option to use any fabric you want to---and cotton would be just as cute for your quilt. It all depends on the look you want for your finished project.