Does this need replaced?

Probably, the batting should be soft. You have it apart go ahead and replace it. Oh and no you do not need to convert it to a fluid unit.

Here is the rest of the unit. Some of the batting is soft but it is hard around the edge of the bowl.

I have never seen a used postwar e-unit with a soft lining. The pellets melt and are soaked up by the lining. When the remainder of the pellets cool, they harden, making the liner hard.
If I was servicing your smoke unit, I would not have opened it up. I would have checked the smoke element for continuity, and tested it with 14-16 volts. If it smoked, I'd run a drill bit through the vent hole from the bottom. to clean out any blockage. (Careful, don't want to enlarge the diameter of the hole or drill through the cap). I would put the bit in a pin vise and do it by hand.
Then clean out any crud, old oil or whatever from the cylinder and piston.

Since you already have the smoke unit apart, I would put in a fresh liner. But be aware that you would loose all that valuable smoke stuff.

 

As far as the element goes: if it is getting hot, it is probably OK, and does not need to be replaced.

I've had smoke units where someone used the wrong stuff resulting in an awful smell. Most times I've been able to just clean it up and change the lining.

 

Here is a tip: in order to get the smoke unit apart, hold it with a pair of pliers and heat the smoke pot with a hair dryer. If you don't, sometimes the solidified smoke stuff has such a tight grip on the heater element that the wires break when you try to separate things. Or the mica plate might snap.

The majority of the batting is hard with only one spot being soft and fluffy.

I didn't take the unit apart - it came open when I removed everything from the shell. Perhaps it was serviced before and never replaced correctly.

I can see that the vent hole is completely clear and open so I am going to check the element for continuity and if it's good I will probably put it back together as is.

Here it is reassembled. Smokes just fine! Thanks for the help!!