There's been a drought causing a shortage of oats for Black Beauty. Ned works at the squire's stable to earn money for Aunt Amy's present, where he learns Potter is stealing oats and selling them secretly. Ned is not believed and Jenny is shut in a grain bin when they try to expose him. Beauty must come to the rescue.

Mr. Duncan, an old acquaintance of Dr. Gordon, asks for a letter of recommendation and is refused. Duncan vows revenge and hypnotizes Jenny to fear Black Beauty. Everyone is mystified until Albert starts to learn the truth.