Entering the mosh pit

Yes, the ssh connection is encrypted and has high latency. The one megabyte block of random data can be sent as a one-off on connection, and topped up in the 'background' when the terminal session is idle for a second or two. It doesn't matter that there is high latency for sending that data since it isn't needed immediately. This scheme would be inappropriate for a connection with lots of data going over it all the time, but it could work pretty well if what you are sending is tiny updates (individual keystrokes, or at most a screenful of text), which come at fairly infrequent intervals (human typing is slow), but they need to be processed with as little latency as possible when they do happen.

I suppose that if the UDP packets have a sequence number and a fixed length, you can still use the one-time pad to encrypt them (if a packet is lost, then that bit of the one-time pad is wasted too).

Others have pointed out how on modern CPUs AES is fast, so it may be a non-issue. (Although I would point out there is a difference between the average speed for decrypting a large block of data, and the speed if you are doing a single byte at a time. I doubt that decrypting just one byte on its own can be done in two clock cycles. But even if it takes a hundred thousand cycles that's still fast enough, on a modern CPU, to display the keystroke 'instantly' to a human user.)