Nothing to do with leveling up. Favour for donations is 10% of the price of the item in currants. The price of caterpillars shows as 500 in the encyclopedia right now, and it was definitely 600 before. They probably just decided that caterpillars were worth too much money for the effort it takes to create them.
That makes me sad xP It was so easy to sell baby animals to vendors. I'll just go back to selling the eggs :P Need to get that 2000 egg achievement done sometime anyway.