Sheep are pretty water-proof out in the fields due to the lanolin coating on the hairs of their fleeces. Indeed, because of the lanolin they can live outdoors all year round, while angora goats and alpacas need shelters. After shearing in the winter, sheep will need access to shelter until their wool is long enough to carry sufficient lanolin to keep them dry. The greasy fleece is also insulating – sheep have a higher body temperature than humans and their fleeces help to maintain this at a constant level both in heat and cold. Even on a hot day it is more likely that they will be seen panting from stress in a particular situation than due to the heat. However, sheep, like us, do not like the rain and will still shelter. In driving wind and rain they will still get wet and chilled, so they are not water-proof in the same way, for example, as fish!
Sheep vary considerably as to the amount of grease they have in their fleeces. Merino sheep have up to 30% strong waxy grease while most British breeds have around 15%. Alpacas and goats have 3-7% only, more if kept indoors. It is a myth that alpaca and mohair do not contain lanolin. However, the grease can be washed out by rain, so historically flocks would be driven through a river to wash them prior to shearing – hence our British placenames such as Sheepwash.
When sheep are shorn, in order to process the wool by machine, the grease is removed by scouring. Otherwise the grease and associated dirt and sweat will make the mill machines dirty and clog them until they cannot function. Once scoured, we add back spinning oil and water to control the fleece through the machines but the majority of the lanolin has gone. It is possible to hand spin with greasy wool, if it is reasonably clean.
Our scouring is gentler and smaller in scale, so less grease is removed than in larger companies, but the wool yarn, once made into a woven or knitted garment, will only be at best water repellent, or “shower-proof”. We can make the structure of the fabric increase water resistance, so a tightly worked Guernsey in a good Guernsey yarn will keep the water out for quite a while, even though the lanolin is no longer in the wool. Indeed, even if we were to vandalise our machines with dirt and grease, the eventual yarn would still steadily loose the lanolin with laundering, once made into garments.
So effective water-proofing can only be done after the wool has been spun, woven or knitted. This may be by using chemicals, but they do not have to be dangerous, synthetic or even expensive. It is possible simply to add a small quantity of walnut oil to the rinsing water after washing a wool pullover, to re-establish a level of grease in the wool with a natural chemical. It is best to use a fine, relatively unscented oil (not virgin olive oil for example) and one without much natural colour as otherwise you may stain your wool. Sweet almond oil would probably work just as well if you keep it to use as a base for aromatherapy oils.
One thing which is a special attribute of wool, and indeed also alpaca and mohair, is its ability to absorb water without being sodden – up to 30% for wool. Also as the water is absorbed the wool fibre temperature rises slightly. Scouring out the lanolin does not remove this magic temperature management capability in the fibres, so it also means that, perhaps, just designing a garment with a dense fabric and the correctly structured yarn, then, if you want, adding oil to your rinse water will get you pretty close to a sustainable, low-impact-chemical waterproof result. You can also consider boiled wool and felt.