i dont believe that little fuzzy things should be growing on your shrimp at any time. I could be wrong by description but fuzzy stuff growing on anything living in your tank usually means fungus. although i can say i have never seen fungus on shrimp before. a picture would be great if you could swing that. In the mean time do all the shrimp have the fuzzy stuff on them? How about the other occupants of the tank?keep us posted this sounds interesting.
The shrimp method is generally used in saltwater tanks, fungus on the dead shrimp wouldn't be a problem. This method really doesn't create the extremely robust colonies that adding household ammonia would, so when the cycle is complete, stock carefully.