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Organic wool yarn is wool that is from sheep that have not been exposed to chemicals like pesticides. The Organic Wool Factsheet of the Organic Trade Association (OTA) gives a detailed description of what does and does not constitute organic wool.
"The O'Mama Report" [1] of the OTA identifies "land management, livestock management, scouring processes, spinning processes and dyeing processes" as key factors that determine whether a wool yarn or product can be certified as organic.