"We eat his rice."
Translation:Nosotros comemos el arroz de él.
It's stating that it was "his rice" as opposed to rice that you purchased. If I was at a restaurant and took the rice from my boyfriends plate, I would be eating his rice. If I the rice was served on my plate I would be eating rice or my rice. So this sentence is perfectly fine. If you skipped "his" then I agree that it should be incorrect. They put it there for you to learn how things like this are said. I, of course, did it incorrectly. :)
De él is different to del because él means 'he' whereas el means 'the', so no, you do not contract de él to del.
I do think it's a tad unnecessary to have nosotrAs here, though, but a minor thing. It confused me to begin with but I suppose it got me thinking about feminine pronouns more than I usually do, being male.