If you check out NFACC guidelines, atleast in North America, the “lack of space” housing such as crates has been completely phased out. All veal farms I’ve visited (Canadian) group house calves in large pens and provide both natural and artificial lighting and enrichment such a toys and brushes.

Over the years, advances in genetics and nutrition have increased the production potential of dairy cows. We have done the same with all agricultural species and their respective products to make more product, more efficiently to keep up with demand. Milk replacer is made with standard nutrient values, so when it’s mixed to a fluid you know exactly how much protein, fat and vitamins are being given to calves. With milk coming off farm, you can’t guarantee each litre has the same values as there is greater variation. Some cows produce milk with more protein, some produce more fat and when it’s pooled together to be fed it’s harder to ascertain if the calves needs are being met or are in excess. Additionally, if calves are getting a higher protein milk one day or feeding and then a lower protein milk the next it can result in some serious digestive upsets that could be avoided when kept on a product with stable values.

Today’s dairy cows produce much more milk, per day, than is physically consumable by calves. Some farms use their own milk to feed calves and the excess is sent to processing for fluid milk, cheese and yogurt, other farms will use milk replacement powder and send all their milk for processing (reasons may be for a more consistent, nutritional product for the calves or due to lack of storage space for fluid milk). Cows only produce milk after having a calf. Cows who are in the 2nd or greater lactation have what is called a dry period which is typically 60 days prior to their due date where they are not milked. A lactation typically lasts 305 days, however, may be longer or shorter depending on health events, timing of breeding, etc. Most calves, in the dairy industry, have milk in their diet for the first 7-9 weeks of age (USA statistic-Penn State Extension) before transitioning to solid feeds to aid in proper rumen development. Hope this helps answer your questions!

Edit to add for credibility: I’ve worked in the dairy industry for 8+ years and have a BSc Animal Science (dairy focused dissertation) and am currently finishing a MSc Ruminant Nutrition.