What version of Mac Mail are you using? I can drag/drop email folders to any position. To drag a folder between two others you have to be careful about drop placement and wait til you get the little blue line with a tiny circle on the left end or else you might end up dragging the source folder INSIDE another folder. I'm using Mail 5.2 on OS X 10.7.3.
EDIT: Ah, I see UFHhd said essentially the same thing. Well, that's two votes for it working ;-)