As explained in the POD Farm User's Manual, the Stereo Monitor In jack is for connecting any stereo line level input audio to hear from the outputs of the UX1. This can be a CD/mp3 player or any other line level audio. This input is not for recording, just for monitoring/listening through the outputs.
You are correct about having to select
input. You can only select two inputs at once and only certain combinations that are available from the POD Farm software or in the Line 6 Audio-MIDI devices control panel.