That, IMHO, is not cavitation. It's too close to the bottom. It's good old fashioned rust due to poor cooling system maintenance (or more specifically, the lack thereof). I had that happen once on a 9700 as well. Not sure if those series of 401 blocks are more susceptible to this problem or not, but the bottom line is that unless you sleeve all 6, you will have problems in the future.
Further complicating things is the fact that the hole is so low in the cylinder wall. I suspect that at least some machinists will tell you that the block is not repairable. If this happens, I would look into pouring some sort of liquid metal into the cooling jacket and raising the floor about an inch or maybe even two.
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Today's Featured Article - Oil Bath Air Filters - by Chris Pratt. Some of us grew up thinking that an air filter was a paper thing that allowed air to pass while trapping dirt particles of a particles of a certain size. What a surprise to open up your first old tractor's air filter case and find a can that appears to be filled with the scrap metal swept from around a machine shop metal lathe. To top that off, you have a cup with oil in it ("why would you want to lubricate your carburetor?"). On closer examination (and some reading in a AC D-14 service manual), I found out that this is a pretty ingenious method of cleaning the air in the tractor's intake tract.
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