The Staff of Herding, and its respective upgrades the Nightmarish, Hellish, and Infernal Staff of Herding, are used to access the 'Secret Cow Level' in Diablo III dubbed Whimsyshire. Each individual form of the Staff is used to access the SCL in its respective difficulty.
- Normal Difficulty: Staff of Herding
- Nightmare Difficulty: Nightmarish Staff of Herding
- Hell Difficulty: Hellish Staff of Herding
- Inferno Difficulty: Infernal Staff of Herding
The Normal staff is obtained by crafting. You will need 50k gold, Black Mushroom, Leoric's Shinbone, Liquid Rainbow, Wirt's Bell, and a Gibbering Gemstone, as well as the plans to make it, which randomly drop off of Izual in the Normal Difficulty (The plans, not the other items). Note, that after defeating Izual in the harder difficulties, the plans may be bought from Gorell who is located within Bastion's Keep Stronghold.
The upgraded staves are crafted using the original staff (or whatever last upgrade applies) and additional gold, as well as the recepie, also obtained from Gorell.
- Nightmarish 200k gold
- Hellish 500k gold
- Infernal 1 MILLION GOLD (HOLY $@@T!!)
Once the staff is complete take The Old Ruins waypoint (Act I) and head west down Old Tristram Road. Hug the south wall. There should be a Skeletal Corpse and a "rift" in one of the crevices in the ground. If you have the Staff, the Ghost of the Cow King will appear with a quest above his head.
Sources:
http://diablo.wikia.com/wiki/Staff_of_Herding
http://www.diablowiki.net/Staff_of_Herding
http://www.diablowiki.net/Nightmarish_Staff_of_Herding
http://us.battle.net/d3/en/forum/topic/5152408516
The items for the Staff of Herding, including the Plan: Staff of Herding are "Account Bound" meaning they are only available to your Battle.Net account. If you want to give it to your buddy the only way is giving him your account password, and you shouldn't do that. You could say it's worth about as much as your battle.net account is worth :)
About your title questions: I killed Izual about 5 times before it dropped. Of course this is definitely not a scientific answer.
Best Answer
Yes. In Bastion's Keep Stronghold the merchant "Gorell the Quartermaster" will sell the Plans to create the staff during the final quest in Act 4 "Prime Evil". He is right beside the healer NPC.
As pointed out by Blem, this only works for the improved version of the staff. The normal plans have to be dropped from Izual.