As amazing as the Velvet Underground were, I always think of them as being one of the most overrated bands of all time. I think "The Parable Of Arable Land" and "God Bless...." by The Red Crayola are much more reminiscent of so-called "free music" and "avant-noise - indie Rock" than anything else that was recorded in 1967/68. The Velvet Underground are great, though, I do have all their records and highly worship them because they made some real good music, wrote great songs etc, but personally I never thought of them as being a main influence on Sonic Youth, although VU surely paved the way for "avantgarde noise" within a "song" context.... VU were more of a "folk" influenced band, SY is more "punk rock".... I would say Can is more of a predecessor to SY than any other band, in a way how they put together their musical work through improvisation (although Can came from a more classically trained jazz background).
Motorpsycho from Norway definitely follow the SY tradition, although they come from heavy rock (Sabbath) and mix it with SY elements....