The rear rack is definitely the place to put it. It doesn't get blocked by bags, nearly all rear racks have specific mounts for lights on the back of them.

While it seems to me like the B&M Toplight is the best dynamo light you can buy, I'm hesitant to say it's the best rear light you don't have a dynamo. The biggest problem is just that it doesn't blink.

I use a Planet Bike Rack Blinky myself, I liked it because it has a fairly consistent blink pattern and a built in reflector. I've been considering, though, whether it would be safer to use 2 smaller blinkies on the rear rack. I always try to have 2 blinkies, run one on steady and one on blinking, because since the light is behind you you can't tell if the light goes out. I've had it happen - battery ran out, battery got knocked out of place, and arrived home to find I had had no rear light for who-knows-how-long on the ride. Most rear racks have mounting for 1 larger rear light, or 2 smaller rear lights.