One reason milk was prioritized over water was a result of a surplus created during WWII. Farmers and dairies were encouraged to ramp up their milk production to ship overseas to soldiers. Post-war, there was a massive surplus of milk and no demand to match it, so the U.S. government was forced to come up with a way to use it and so the very first federal subsidized program was enacted in 1940 targeting select schools in Chicago, to offer low-cost or free milk to students.
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Over a decade later the Special Milk Program was born in 1955, which put milk in the hands of school kids at recess and lunchtime nationwide. The program stipulated that children would receive a half pint daily, and schools would be reimbursed for the milk they provided. This program has been extended not just to schools but summer camps, childcare programs, pre-K programs, and more.
Water, though it must be made available free of charge under the National School Lunch Act, for schools participating in the National School Lunch Program (per USDA), is not a requirement to have with lunch. And, according to those in the dairy industry, milk is prioritized over water in cafeterias to help school kids meet their daily nutritional needs for calcium and vitamin D, among 13 other essential nutrients.
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