Most definately a bearing, probably the inner axle bearing, came apart. The balls try to wedge in between the bull gear and the housing and the housing loses.
How big a hole are you talking about? If you have the piece it could be welded back on or I've seen patches fabricated to go over such hole, but not as pretty.
By $600 for a parts tractor do you mean buying another tractor for parts to fix this one or buying this one for $600?
You'll want to pull the platform off to see if there is any damage to the bull or pinion teeth. Sometimes the ball can get wedged in the bull gear teeth and then go through the bull/pinion mesh.
With the platform off, the wheel bearings are not hard to change. If the one was worn loose enough to come apart, others may not be far behind. If you shop around you can find a domestic made inner bearing in the $90 dollar range. The inner bearing is a 214W. The "W" means it has more balls and thus a higher load capacity. The outer would be a 214D, it has a shield on one side to help keep the grease nearby. You can use the inner on the outer side for more load capacity, would be a 214WD!
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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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