Exit Fred's house and enter the field just southeast of it.
Use your shears on all of the woolly sheep until you have a good 20 pieces of wool. If there are no more woolly sheep, don't worry! They will become woolly again after a certain amount of time.
After you've collected 20 pieces of wool, head into the Lumbridge Castle and climb the stairs to the second floor. In the southern room, there will be a spinning wheel. Use your wool on it to make 20 balls of wool. You'll get some Crafting experience from each one too!