What is not sold in supermarkets is bought, in bulk, by the Agriculture Department and stored in the warehouses until some of it can be parceled out for school lunches, to military installations or to countries receiving food purchase loans under the Food for Peace program. Recently, the Government has started giving a small portion of the surplus cheese and butter to low-income Americans.

Unlike all the other major price-supported farm commodities, there is no limit on how much a dairy farmer may produce and sell to the Government.

Currently, the Agriculture Department is buying the surplus milk for $13.10 a hundred pounds. Congress, which has received generous campaign contributions from the dairy industry, had been raising milk price supports twice each year until President Reagan put pressure on it to hold the supports at the $13.10 level last December. Surplus is Increasing

Mr. Block hoped this would discourage excess production, but it has not, and each month since then the cows have produced more and the surplus has increased.

Virtually none of the mountains of butter, cheese and dried milk has spoiled, although some of the unprocessed cheese will soon have to be processed to preserve it.

''Despite all our efforts to move the dairy suplus into use, even by giving some of it away to charity, the outgoing isn't keeping up with the incoming,'' said James G. Schlick, the director of the Agriculture Department's Kansas City commodity office.''We're running as hard as we can, but the harder we run, the best we can do is barely stay in place.''

Things have got so bad that Congress, with the acquiescence of the dairy industry, is now trying to fashion a new dairy price support program, probably one in which farmers would get the full $13.10 support rate on 90 percent of their milk and whatever the free market would bring for the rest.