I agree with you on 'The Crane Wife.' The entire middle of the album not only sags, it's easily skipable. I don't think 'Her Majesty' is their best, however. Sure, it has some good songs: 'The Soldiering Life' is fun and has that awesome chorus and 'Los Angeles, I'm Yours' is very good (lyrically it may be the best on the album), and 'The Chimbley Sweep' is also a quick, fun little song as well.
But the overall quality doesn't match that of 'Picaresque' with it's brilliant opener all the way to its epic climactic moment and its rather beautiful denouement. I'll admit 'Sixteen Military Wives' is a bit too 'single-y' in a radio-friendly sense but when you have songs as lyrically strong as 'The Bagman's Gamibt,' 'Eli the Barrow Boy,' 'The Engine Driver,' and 'The Bus Mall,' it's kinda hard, for me anyway, to see the quality comparable to 'Her Majesty's.
Of course, we can't forget 'Castaways and Cutouts.' It's the first Decemberists album I heard (I got it the week of its release) and I listened to it non-stop for weeks after. I sometimes think it's their best album with such brilliant/beautiful songs as 'Grace Cathedral Hill,' 'Odalisque,'Cocoon,' and 'Clementine' and songs with such terrific energy as 'Legionnaire's Lament' and 'July July.' It's a really excellent album.
Long story short, I couldn't really pick a favorite but I can narrow it down to Castaways... and Picaresque since The Crane Wife is too weak in the entire middle and Her Majesty has some decent songs but a lot of filler.