Thanks for the quick response. So, I use Paint.Net because I'm comfortable with the tools in it but I don't use it to save anything. I open the original DEM in GIMP (layer1). I use paint.net with the new DEM and my field dimensions so I can select only the new DEM within field dimensions area (picture 1). I use curves to balance the B/W values so it matches up with the original DEM, and a feather effect to fade the edges of each field so the original blends in nicely with the new. I put this into GIMP as another layer, and then merge the two layers, and export as 16-bit GRAY out of GIMP. Finished product out of GIMP in picture 2. Export settings in picture 3.
Worth noting this is a 4x map, so I'm working in 2048x2048 sizes. I am testing in GE, but the result is the same with a fresh save game.
I just opened the DEM in GIMP, and only resized from 2049x2049 to 2048x2048, exported and reloaded in GE and got the same effect. So, I think It's my settings in GIMP?