Lots of wool yarns (commercially made too) smell like sheep when wet. The higher the lanolin content, the more it will smell. It usually fades to almost nonexistent when dry, but will return again when wet.
Lanolin is the grease on wool and is what smells, not the wool itself. You can wash the yarn, but removing all of the lanolin is not easy. The water must be very hot to melt the waxy oil, and the higher the temperature, the higher the chance of felting.
Lanolin on wool is actually a good thing because it makes your hand soft as you knit with it, and it gives the finished item a water resistant property. So... my suggestion is to just let the yarn dry.
ps you can also spritz the yarn lightly with a body spray or perfume to mask any odors. I use a lightly scented body spray (Philosophy's Grace perfume) on my yarns.