You're going to need a precision quadrature encoder: the one you link to can do only 1024 p/r so 0.35°, so you need at least double the pulse count. I don't have any specific ones in mind.
Another option may be an IR distance sensor, measuring the location of the end of your blade (where the largest movement is). The distance the sensor returns is of course also a direct measure of the size of the object passing through. E.g. this digital time of flight based one, or this analog one. Of course there are more such sensors, in various accuracies/price classes.