In my experience merino doesn't work well as rags, old cotton t-shirts are much better.
What to do with them?
Darn the holes
Elbow patches
If you are/know a crafter they can be used in all manner of ways
Pipe lagging
Loft insulation
Small animal bedding
Leave one outside and let the birds pick at it for nesting material
"Penny for the guy, mister?"
Cut into strips and use as large plant ties