What you found under the valve cover isn't at all unusual. Water in the crankcase doesn't really mix with oil but it does get dispersed and suspended in it along with the usual fine bits of ash and crud and when left to sit will create the milky sludge like you're seeing.
What will be more important is what you find when you drain the crankcase. With the motor not running for a day or two, to give everything time to settle and separate, loosen the drain plug but hold the plug so that it flows slowly, and drain the first quart or so of what comes out of the crankcase into something like a mayonnaise jar that you can see into. Once you are getting just oil, go ahead and finish draining it in the usual fashion.
If all you get in the jar is oil, that would be a good sign.
If you get water, there's two things to consider. 1) is how much. Less than a pint could be from condensation from sitting and not being run to boil it out. 2) is what's in your radiator. If you get clear water, and you have antifreeze in your radiator, that's still a good sign, as far as it goes, suggesting that the oil in your radiator may not be the result of a bad gasket or crack in the head or block. That's not to say that it isn't -- the water may still have gotten in that way if at some time the radiator ws filed with straight water, and the antifreeze added later.
Here's how I'd proceed, provided you didn't get an excessive amount of water out of the crankcase. Drain the crankcase as I described and see what you get. Scrape and wipe off as much of that sludge as you can, then get some diesel or kerosene and a brush and clean up the rest of it. It will run down into the pan and drain the same as your oil. When I've done this, I've chased it with a dose of kerosene from a bottle down through the various openings in the head to help rinse everything down to the pan and out the drain.
Replace your drain plug and valve cover, change your oil filter, and put five fresh quarts of oil into it.
Then drain your radiator. It may not drain completely, which means that the oil that is in there already might remain. To get around that, I'd mix up some washing soda (a couple of pounds worth, about half of the size of box most commonly found) into four gallons of water (mix it together first!) and refill your cooling system with that.
Then, like the others have said give her a good run, making sure she warms up and circulates well. Then drain it. (It will come out black when you drain it, but that's not necesarily oil and no reason to panic. The rust and sludge in the motor turns black in reaction to the caustic nature of the soda. Let the engine cool for a while and, with the drain still open, flush what you can out with a garden hose running down the filler neck until you're getting clear water. Replace the drain plug and refill with an appropriate amount of water and anti-freeze. (In the summer, I'd say refill with water just to avoid having to deal with the antifreeze disposal later if you do have another problem, but I'm asssuming you're not in Key West, so use antifreeze as appropriate to your location and weather. The other advantage is that with your clean crankcase, any problem with the gasket, head or block should now put antifreeze if anything at all into your oil, not clear water. Kind of like using a dye to find a leak.)
My thinking is that the washing soda will break up and suspend whatever oil remains, so that when you drain it you'll have a cleaner system. When all this is done, you should have relatively clean oil and cooling systems and, at the very least just done some maintenance that sounds like the tractor needed anyway.
Then it's time for running it the way Hugh and Gene suggested. Check it periodically and, if you have no new oil in the radiator and a little sample drain of the crankcase (again, after being given the chance to settle afer running) doesn't show any anti-freeze, you're safe to go.
Like one of the others pointed out, there's noting to say that somebody didn't dump waste oil out of a jug and then use it to mix the antifreeze, or use their dirty oil drain funnel to fill that radiator.
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