Animal Dreams opens with a brief chapter narrated in the third person, from the point of view of Doc Homer. This establishes a double narrative voice, which switches between dreams and memories of the past and events of the present. Doc Homer remembers his daughters, Codi and Hallie, when they were young. Their mother is dead.
In the second chapter, narrated by Codi in first person, the plot line begins. Hallie leaves Tucson, Arizona, where she was living with Codi and Carlo, for Nicaragua. She plans to assist the newly established communist regime with their crop cultivation. Shortly thereafter, Codi also leaves Tucson, returning to her small rural hometown, Grace, to care for her ailing father and to teach high school biology. The return to Grace is fraught with difficulty for Codi, as she has always felt herself an outsider in the town and has never had a very close relationship with her father. Her return home raises the specter of several mysteries surrounding Codi and her family's past: her failure to hold a medical license despite her attendance at medical school, the deaths of her mother and of her child, and the relationship of her family to the rest of the community.
In Grace, Codi stays in her friend Emelina Domingos's guest house. As the two women talk, Codi's high school relationship with Loyd Peregrina is revealed. Loyd, a friend of Emelina's husband J.T., still lives and works in town. Re-visiting Grace, Codi is again struck by her feeling of being an outsider. Codi and Hallie's mother died shortly after Hallie's birth. At the age of fifteen, Codi became pregnant with and then miscarried Loyd's child. She never told anyone. Her father, the town doctor, was aware of the situation, but Codi still does not know this.
Codi and Loyd meet again and begin a new relationship. Loyd, a Native American who grew up on the nearby Reservation, is ready to establish a serious and committed relationship, but Codi is not ready to imagine herself as staying in one place or loving only one person. Loyd accepts her ambivalence. They continue to see each other, and he teaches her about Native American Cultures.
Meanwhile, the town of Grace faces a terrible threat to its very existence. The local Black Mountain Mine has been dumping sulfuric acid and other chemicals into the water supply for years. This water is necessary for the irrigation of the pecan and fruit trees that are integral to the community's survival. While the men of town notified the Environmental Protection Agency of the problem, the only solution the EPA requires, that the river be dammed above the town, is almost worse than the problem. The older women of the town, who meet weekly at the Stitch and Bitch Club, take their own initiative. They make piñatas, decorated with the feathers of local peacocks and accompanied by a note detailing Grace's problem, which they sell in Tucson. Because Emelina's mother-in-law Viola is one of the main organizers of the Stitch and Bitch Club and because Codi's education is of great help to their cause, Codi joins with the women. She involves her classes as well. As she becomes a part of the community effort to save the town, Codi also begins to learn more about her own family's past. It turns out that the story her father had always told her about their family—that they were outsiders in Grace while almost everyone else is related to one another—may not be exactly true.
All this time, Codi and Hallie, who have always been extremely close, exchange letters. On Christmas Day, Doc Homer receives a call from Nicaragua informing him that Hallie has been abducted by the US-backed Contras. Codi is thoroughly distraught. She spends the next few months between deep depression and frenzied attempts to find Hallie. During this period, the efforts of the Stitch and Bitch Club gain an enormous amount of publicity, and finally an art dealer arrives in Grace who offers them a solution to their problems. They can apply to have Grace named a Historic Place and gain federal protection for their orchards and their water supply. In helping to document Grace's historic status, Codi learns more about her own family history. It turns out that both her mother and her father are natives of Grace and are related to everyone else in the community. Her father is descended from the black sheep of the founding Gracela sisters, and therefore he tried to change his name to pretend that both he and her mother were outsiders. Although everyone went along with his facade, the whole community is aware of the truth. This discovery combined with her involvement in Grace's present struggles allow Codi to slowly feel that she is less of an outsider, although she still does not plan to stay in Grace beyond the one-year teaching contract.
Toward the end of the school year, Hallie's body is found in Nicaragua. The Stitch and Bitch Club file the Historic Place petition and the Black Mountain Mine declares that it will shut down and clean up the river. Codi leaves Grace to rejoin Carlo, not because she loves him but because he is moving on and she still feels a need to do the same. However, the plane she takes to join him has engine trouble and is forced to turn around. When they land safely back in Tucson, Codi immediately gets on a train and returns to Grace. She holds a memorial ceremony for Hallie, which all of Grace attends. As she buries the symbolic bundle in Doc Homer's garden plot, the two of them finally clear up the last of their secrets. Codi also tells Loyd about his child that she lost. In the last chapter, we see that a year later, Doc Homer is dead, and Codi, still teaching at the high school, is again pregnant by Loyd.
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