In "The Inconveniencing", Mabel talks to Wendy about the dance after Dipper insists he doesn't dance at all. She esxplains how Dipper was dressed up in a lamb costume to sing a song about grazing when he was younger.
Later, when at the abandoned Dusk 2 Dawn, the angered spirits of Ma and Pa Duskerton imprison Tambry, Thompson, Nate, and Lee and begin a paranormal rampage out of a hatred for teenagers. To appease the ghosts and free his friends, Dipper agrees to perform the song for them, much to their pleasure.
Well... who wants a lamby, lamby, lamby?
I do! I do!
So, go up and greet your mammy, mammy, mammy
Hi there! Hi there!
So march, march, march around the daisies,
Don't, don't, don't you forget about the ba-by!
- 105. "The Inconveniencing"
- The "Lamby Lamby Dance" is based on writer Michael Rianda's childhood experiences of being dressed up like a lamb by his sister and being forced to dance.