Consumption of non- or low-fat dairy products is recommended as a strategy to lower the risk of childhood obesity. However, recent evidence suggests that consumption of whole fat dairy products may, in fact, be protective against obesity. Our objective was to determine the association between milk fat consumption and severe obesity among three-year-old Latino children, a population with a disproportionate burden of obesity and severe obesity. 24-hour-dietary recalls were conducted to determine child intake in San Francisco based cohort recruited in 2006–7. Mother-child dyads were weighed and measured. The 24-hour recall data was analyzed to determine participants' consumption of whole milk, 2% milk, and 1% milk. The milk consumption data was used to calculate grams of milk fat consumed. The cross-sectional association between milk fat intake and severe obesity (BMI ≥ 99th percentile) was determined using multivariable logistic regression. Data were available for 145 children, of whom 17% were severely obese. Severely obese children had a lower mean intake of milk fat (5.3 g vs. 8.9 g) and fewer drank any milk (79% versus 95% for not severely obese children (p < 0.01)). Among the potential confounders assessed, maternal BMI and maternal marital status were associated with severe obesity and were included in a multivariate model. In the multivariate model, higher milk fat consumption was associated with lower odds of severe obesity (OR 0.88 CI 0.80–0.97). Higher milk fat consumption is associated with lower odds of severe obesity among Latino preschoolers. These results call into question recommendations that promote consumption of lower fat milk.