My 2 year old's teacher at church told me about this one:
You can use packing peanuts to build things!
They have to be the biodegradable kind or it will not work. I happen to have some in a package we had just received in the mail. But, his teacher said that you can buy them at any packaging place like UPS.
Put some water in the bottom of a shallow bowl and dip one end of a packing peanut in the water for just a second. They need to get moist, but not soaking wet, or they'll start to dissolve.
My 5 year old wanted to make Ninja men. So, we let them dry for a minute and then used markers to decorate them.