Talk to the Composer to begin this quest, choosing For The Flute. He will say the following:
For The Flute
Are you enjoying the wondrous sounds of the ocarina? I do hope so. I'm... I'm thankful we've gotten to work together. But don't let that go to your head!
Let's continue this work then, shall we?
I think it's time for you to learn how to craft an instrument for yourself. There's a quite unique instrument known as a pan flute. It carries a beautiful, almost foreign sounding tune that I think you will enjoy.
I've got a special wood you'll need to craft it, but I don't have the other tool required. It's a special carving knife you'll need. In the jungle there are some people known as poachers. They will likely have such a knife.
Once you've crafted the pan flute, return to me so I can see the flute you've made, and I might have one more idea for us to work on.