Milk Bucket

Milk is a food item and an ingredient in cake obtained from a cow by right-clicking on its udder with an empty bucket. Milk buckets can be emptied by right-clicking on a block to pour out the milk, but the contents will be lost, as milk cannot be placed like water or lava to form liquid springs.

Milking Tips
Cows are more easily milked if the player stands one level below them. They can be milked an infinite number of times and will produce milk 100% of the time, but the difficulty of milking free-roaming cows (especially on SMP with lag) perpetuates the myths that milk production is random, that cows can be milked a definite number of times, or that certain cows won't produce milk.

A simple, reliable way to milk a cow is to place it in a milking stall consisting of a 1 block wide water channel that leads to a fence with a roof to prevent the cow from escaping vertically. A cow can be pushed into the stream or the player can wait for one to be caught in the water current and be pressed against the fence. Standing 1 block away from the fence on the opposite side as the cow will enable the player to milk the cow easily.

Another simple way to milk cow is to make them go into water. After that, you go under water. Since the cow doesn't see you, it will not flee and make it easy for you to milk it.

Use
Right clicking with a full bucket of milk will start eating animation. It doesn't fill up hunger bar, but if your are poisoned by a Cave Spider, or by eating Rotten Flesh it will cancel the effect.

History
Milk was introduced in Alpha 1.0.8, but had no purpose until Beta 1.2 when it was incorporated into the crafting recipe for cake.

According to a tweet by Jeb on September 30th 2011, in Beta 1.9 Pre-release 2 Milk is a cure all that clears all potion effects.

Trivia

 * In Beta 1.2_01 through 1.4 Squid could be milked by right-clicking on their mouth if part of their body was exposed to air or if they were not touching another block. An easy way to accomplish this was to pull a squid with a fishing rod away from other blocks and then milk it. Squid milking was removed in a subsequent update.