If you've played Minecraft, think of it like this. Minecraft has blocks, but they also have things like carpets. The terrain elevations in Valheim are like minecraft blocks with varying levels of carpets to create more smoothly rolling terrain. One block height might be equivalent to 6 carpet heights so you get X, X+1, x+2, ... X+5, 2X, 2X+1, etc. (Obviously Valiem renders terrain with connected polygons where Minecraft just renders blocks and carpet layers.

The spot you are standing on might be 4X + 4, and the spot you are hoeing might be 4X+2, so the Hoe can raise that to 4x+4... If the spot was 4X+5. it could lower it to 4X+4. However, if the spot was 5X+1, the hoe is limited to adding or removing "carpet" layers so it can only reduce it to 5X leaving a noticeable bump. This is the limit of the Hoe's "free" adjustment. If you step on the bump and try raising your old terrain, it can only raise to 4X+5, not 5X. You need to use the Pickaxe to +1 or -1 X, which can then be leveled with the matching terrain. So depending on where you are standing, some terrain might be a different "block" than you that needs to first be matched, then the Hoe can level it out with the rest.