Login to sandbox instance
By default, after you install Data Loader, the default setting is configure to login to Production instance. You need to change in Data Loader setting to point it to sandbox instance.
Go to Settings and change the default value of "Server host (clear for default)" from https://login.salesforce.com to https://test.salesforce.com
Update fields to null
If you update a field with blank value, if the value have existing value, notice the value will stay the same (not updated to blank). To overwrite existing value with blank, you need to change Data Loader setting.
Go to Settings and select "Insert null values".
This option is not available if the "Use Bulk API" option is selected. Empty field values are ignored when you update records using the Bulk API. To set a field value to null when the Use Bulk API option is selected, use lue of #N/A in the CSV file.