A.L.
Hi R.! My son is allergic to all dairy products, and he does develop a rash if he ingests any, but it also comes with a slew of other problems (vomiting, itchy/swelling throat, a lot of mucus production, etc.) This sounds more like a contact reaction to me (like maybe the detergent mentioned earlier?) You could always switch to soy milk for a couple weeks and see if it makes a difference. My advice would be to not switch off both the milk and cereal at the same time, so it will be easier to figure out which one is causing it, if either of them.
About the contact reaction thing...my 2 year old is allergic to cinnamon, but it's only a contact allergy. If he eats foods containing cinnamon and he gets it on his face, belly, etc., he breaks out in a red rash...it's not real rashy-looking, though, just red and splotchy. He doesn't get it much, either, if we wash the cinnamon off right away, but if it's left on his skin, he gets red and itchy. Good luck--it can be hard to figure out the culprit sometimes :)