The milky oil is water contaminated. It definitely needs changing.
But, the milky oil is not stopping the hydraulic lift from working. That needs to be diagnosed first so new oil doesn't have to be drained to get the pump out.
You really need a repair manual before starting this job. It will explain how to diagnose hydraulic problems better than I can here.
Once the diagnosis is made, then the oil drained and top cover can be removed. If the pump needs to come out, and it probably will, then the inside of the case can be accessed and washed out. Water in the transmission is a common problem on these old tractors. It gets in through condensation and around the shifter boots if they are weather cracked or missing.
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