Sheep accumulate faeces on wool around their backsides, and the wool and the associated faeces need to be removed, usually in late spring or early summer after weaning so that there is a lower risk of fly strike, and so that the rams can find their target with the ewes during mating or tupping.
Dags accumulate as hard accumulations around the sheeps' backside if early summer is dry, and if dagging is done, these can provide sheep farmers with some small early season income.
If dags dry out, they rattle when sheep run, this gives rise to the NZ and Aust expression rattle your dags.
In NZ where sheep rule (joke) dagging is usually done by shearers. The mixed sheep poo and wool produced by dagging is processed to make garden fertiliser and some low grade wool fibre.
Related definitions: rattle your dags
NZ Farmer (Fred, over the fence): Yeah I know, delayed as we had a wet summer.