Originally posted by Lucidess:

Where does it tell you that you can hold shift to change the height like that?

That's awesome, thanks for letting me know.

It's not really in any of the game's tutorials (it's only pointed out in forum posts, wikis, and online guides), but holding left-shift while using the hoe gently levels ground based on where the cursor is pointing rather than the ground level immediately under your character's feet. By holding it down while gradually leveling bit-by-bit along your desired path, you can get a fairly smooth grade. Not always perfect, but workable.