Taking a wild guess here, it's probably in a well hidden overworld spot.
Have you found anything interesting in the cave northwest of town. It leads to 3 total items...
If you have Ladder are access to Level 6's area, maybe a certain old man hint isn't a joke...
5 is weird to navigate, but I don't think I Flute lock any item in there.
Of course, Lens should mark all these.
i got all 3 of those cave items, i bombed all rocks in fire area. There are 2 spots in lvl 5 that require flute, one leads to a small key, and the other to an item + boss key
I think whatever seed was generated somehow put the flute in a spot that requires it to use. There are at least 6 or 7 flute spots in overworld, and one has heart piece, one has arrow upgrade, and the others I don't know because you dont see those items until you open it.
Perhaps I can upload my save file and someone can figure it out. I just want to know what I am missing. I got the item in the tall grass that can be cut, I got the item in the skeleton in the desert, the hidden item in the lost woods, etc .. I can;t get into 6 at all because its flute locked, so if flute is in 6, 8 or 9, then that is a problem with the random generator, because I can't reach 8 or 9 because one of the arrows is flute locked.