TO20 water in oil

I acquired a TO 20 a few years ago. When I got it, they said it was running before being parked in the yard for some time. Mice had chewed all the wiring. I rewired everything enough to get it to turn over. Got it to fire a couple of times then it backfired and the starter locked up. Found the nose cone of the starter had broke in half. Removed the starter to try to find a new one. Kinda lost interest for a few years. Recently got a new starter and started working on it again. Decided to change the oil since lords when it was last changed. Pulled the drain plug and a lot of water came out. Let it drain over night. Pulled the filter and screen this morning. Thick and milky is what I found. Filter completely clogged as well as the screen.
My question is, could water have seeped in due to sitting for so long? Do I clean out the oil pan with diesel, change the oil and see what happens?
I've never owned a Ferguson, or any other tractor for that matter. Just looking for a starting point.

You got a heck of a starting point. Real good chance, almost excellent, for a cracked block.
Your procrastination is going to cost you some time and money. Drain all that glop, change the filter,
You could fill the crank case with diesel and rinse it out. Not a bad idea. Yes, water could have
gotten into the machine but usually only through the shifter handle or the large spring behind the
seat. That water will only kill the hydraulics. A minor issue we can address later. The engine could
have picked up condensation. Is the radiator below the fins? if you can't see the level, it should
only take between a shade over two quarts to to fill it up. Another item is the coolant. if it was
weak when parked, your engine might have frozen. You could get yourself a can of KN Block seal but
that requires a running engine with a working thermostat, cardboard and a non contact temp gun. As for
the hydraulics, water in there probably messed up the control valve at the bottom with rust. About
$25. Pressure relief valve at the same time your in there. Beyond that a fluid change is also in order
How's that radiator fluid level? That should be a good indicator of where to start. Another
possibility are the "O" rings at the bottom of the cylinders may have shrunk allowing water into the
crankcase. That will also be evident in a low coolant level in the radiator.
Coolant level is whuuut?

Ok. Here's an update. Changed the oil. Believe water in oil was from a couple different possibilities. Oil fill cap basically has no rubber seal, filler tube and cap rusted pretty bad. Air filter was also full of water. All of this was cleaned and reassembled. Put everything back together.
Decided to bump the starter a few times. Immediately heard a knock.
Drained all the oil I just put in it. Dropped the oil pan to investigate. Crank looked good. Cam looked good. Noticed the sleeve on #3 cylinder had approximately 1/3 of it broke off. Rest of the sleeves looked good. None of the rods appeared broke, however, #1 looked like it "might" be bent.
Question is do I need to do complete overhaul? Or can I do sleeves and seals on #1 and #3 plus rods?
Not necessarily trying to take the cheap way out, but figure they sell the piston/ sleeve kits individually for a reason.
Forgive my ignorance, just new to working on tractors.

if you have the ability, the tools, the time and inclination I would say rebuild it or sell it for parts.

Band aids work good until they fall off. Then you wind up with an infection and twice the aggravation of waiting for it to heal. Had you bandaged it properly in the first go round, you would not be doing it twice. Problem with most the old Fergys is the webbing between the cylinders starts to fall apart. IF your is good then a decent rebuild might be in order.
If the engine cranks, I would be inclined for a comp check figuring two new cylinders on top of two old cylinders might be a vibrating mess. However if the old cylinders are up to snuff, it might work out.

Ok. I was just asking because I have never worked on a tractor. I do understand the whole concept of do it half @$$, and do it again. I have no problem doing a complete overhaul. Just puts me out a little longer, $200 vs $500.
Thanks for the input. Please remember, I'm new to the whole tractor thing.

While the pan is off, before disassembling any more, fill the radiator and look for leaks on the underside of the block. Might take a day or so to show up, but look for water to come down around the sleeves, especially the broken one. Look for freeze cracks, cracks in the webbing between the cylinders. The possible bent rod, that is an unusual condition. If it is bent, that's an indication of possibly a blown head gasket, but could have been an old injury.

Chances are, the deeper you explore this, the more problems you'll find, the more profitable to just go ahead and pull the engine, do it right.

A shop manual would be a very valuable investment. It will pay for itself many times over in mistakes not made!

My introduction was her saying we need a tractor. I started looking and I said "Bring money."
She asked how much, I told her and she said "Too much!". Later the subject of a front loader came up, I started looking and said, "Bring more money." So she started looking and one day she called out... "I Found It!" Found what? I said. It's a 1940 9 N Ford tractor with a front loader!!
I knew what a tractor was. Big wheel in back, little one in front, steering wheel in the middle, Good for driving on dirt. I knew Ford. Now did she say 1940 0r 1949 N tractor? What's a N?
So I look at the computer and there is a tractor in a barn. Looks dead. ran when parked. Okay, I can fix it if it turns. Buy it, drag it home and the front axle nearly breaks off rolling off the trailer when it gets home.
That was my intro. Her Fergy showed up with a Howard and Hupp trans and has been a money pitt from the get go.
However most others have at least financially broken even to turning a nickel or two as they left.

I'm with the rebuild crowd. If it truly is just a broken sleeve and maybe a bent connecting rod you are on the cheaper end. Cracked block
repairs vary in cost and new crankshafts are about $400. I think a resleeve piston kit is about that price and the engine is easy to work on.
Plus we are all here to give advice and encouragement.

Let us know how you are doing.