Willy Wonka's cotton candy is the wool of his Cotton Candy Sheep. You enter the room while on the Great Glass Elevator, You see a neon hot pink lights, tubes full of cotton candy and Oompa Loompas sheering pink sheep. Willy Wonka starts talking but realises that if anyone knew where his cotton candy came from it might not sell, so he says " I might not want to to mention this".
Game-
Although you don't get to go to the room itself, in the Store Room 59 mini level you see some Cotton Candy Sheep and have to sheer them.