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Do you know what you need to be able to get 5 star wool? I think I need to upgrade the wool facilities to level 3, and I have the money, but I have no idea what the item is 

You need the right combo of sheep employees (you may also need to level the employee up to level 2 - I haven't needed them at level 3).  There's a black sheep (Silas?) you can get from the 2nd level of advertising and a white sheep you can get from the 3rd or 4th level of advertising.  They produce higher quality wool (both will tell you as much when you interview them)  Some you may need to pair up together to get 5 star wool.