Let's look at the sentence and make it easier to read and grammatically correct:
"Domestic animals live with people and are useful in many ways. Cow’s milk turns into cheese and cottage cheese, and sheep’s wool is used to make warm yarn."
Here are the corrections:
1. Add an apostrophe in "sheep’s wool" to show possession (the wool belongs to the sheep).
2. The rest of the sentence is good and clear.
So the corrected sentence is:
Domestic animals live with people and are useful in many ways. Cow’s milk turns into cheese and cottage cheese, and sheep’s wool is used to make warm yarn.