Where do I find salt peter and red wood?

Both these items don't turn up until you start the Second chapter's Challenges. For Salt Peter, go to the place where you get Steam, but continue moving the villager all the way to the water next to the cliff on the left side of the screen. I first couldn't find it because I didn't go far enough to the left.

For Red Wood, look at the tree growing between the Cave entrance covered by a Boulder, and the Open Cave, and you'll see that a branch on the tree have now grown out over the path the villagers walks past it on. That new branch is the Red Wood.