Source:  http://www.gracematters.org/interviews/m.fuller.html

Bread from a bakery is best. Look for the tallest loaves. (Take your tallest manger figure with you when you shop to see if it will fit.)

Using a kitchen knife cut out the area where your figures will sit. (Note the photo). Scoop out the soft bread inside to make a "cave" and let it stand. (Scooped out bread makes great bread pudding.)

Bread takes several days to harden and dry out. If you must rush you can leave it in the oven on the absolutely lowest setting. NOTE: Bread may shrink in the oven. I often prop the tallest figure in the "Cave" to make sure it will fit when completely dry.

When dry, brush on a coat of polyurethane or shellac inside and out. You can use a spray can for the inside rather than get the crumbs all over your brush. When the polyurethane is dry you can use Spanish moss to line the walls of the "cave." You can hold the moss in place with a few dots from a glue gun.

Next use your glue gun to firmly anchor your figures in place.

You can put moss in front of the manger, too.

Decorate on top with a small poinsettia, holly, ribbon, spring of wheat, or you can glue a small star on top. Use your imagination!

Tips:

I have found moss clinging to dead oak tree branches, or you can buy it in craft stores.

Some people frame the opening to their "cave" with icing.

Mangers can also be made from round loaves of bread – some dark bread loaves are effective. Dinner rolls may be used for small tree ornament mangers.