Hi Mark,
I can't imagine that anyone who's been paying attention in the arts or humanities in the last 15-20 years could think that the use of queer is derogatory. It sounds to me like they have a woefully incompetent panel of reviewers. But pointing that out to them probably isn't going to change their minds.
What might convince them is pointing out that queer is widely used in official contexts by well recognized institutions. A few examples
Smith College - Queer Studies Concentration
http://www.smith.edu/swg/q
UCLA - Los Angeles Queer Studies Conference
http://www.humnet.ucla.edu
Indiana U. - Queer/Sexuality Studies
http://www.indiana.edu/~ge
California State U. Northridge - Queer Studies Program
http://www.csun.edu/qs/
Tufts U. - Queer Studies program
http://ase.tufts.edu/lgbt/
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