This is a (stupid) effort to keep the price of milk up. It has a number of unintended consequences, including not rewarding the best producers for their improved management.
Here in the US at least it's not discarded (usually); instead it's purchased by the government. From there it's turned into cheese and given out as welfare. (Most of it often spoils before it's given out, so it might as well be dumped. :-P )
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