Alright, so I decided to post the issue on my blog as well as on the crydev forum. If you have a crydev account and know how to fix this issue please post on the forum!
When I created my world in World Machine, and I export the heightmap. When I import it into CryEngine I get some pretty ugly results that really do screw up everything. I tried smoothing the entire map but it loses all the detail that the original heightmap had.
In World Machine
This is the outcome before smoothing,
Then after smoothing it looks like this,
I'm just wondering how I can export my terrain heightmap without having the horrible clipping. Smoothing doesn't improve it that much because it still leaves sharp bumps on the surface. I have no idea how to fix this issue. I've tried adding blur to the images in photoshop and they still came out with the rough terrain. No matter what I export from World Machine it is the exact same result every time. When I try to smooth it I lose all the detail in the level and all the mountains just look like blobs.
I also get this orange glow that is really noticeable at distances, and flickers when up close. (It reflects the sun color so during mid-day it's a bright blue glow.)
Playing with the level some more I've noticed it flickers a lot every couple of seconds. No idea what is causing it.
Update: The issue itself was linked to the size of the heightmap. I managed to get it to import correctly when I resized the heightmap to 4096x4096. Despite it being a 8192x8192 map it imported okay. I'll still have to edit the entire map to have it be playable so while I'm doing that I'll also clean up the import. Considering it's a 16,000 km squared map it'll take a while.