UPDATE 3-Monsanto cuts 2010 outlook; shares fall 7 pct

* Repositions Roundup business

* Cuts FY 2010 earns and free cash flow guidance

* Sees ongoing EPS for 3rd qtr to be 75-80 cents

* Shares fall 7.2 percent (Recasts paragraph 1, updates share drop, adds analyst downgrade, details)

By Carey Gillam

KANSAS CITY, Mo., May 27 (Reuters) - Monsanto Co MON.N, the seed and chemical giant, sharply reduced its full-year earnings and cash flow forecast, citing a need to cut back its Roundup herbicide business as it gets hammered by Chinese competition. It shares fell more than 7 percent to a three-year low.

Monsanto, which is the world’s largest seed producer and a leading maker of agricultural chemicals, said after re-examining its herbicide business, it expects fiscal-year 2010 earnings of $2.40 to $2.60 per share on an ongoing basis, and $2.15 to $2.41 per share on an as-reported basis.

Earlier this month, Monsanto said profit for fiscal 2010, ending in August, would be at the low end of a range of $3.10 to $3.30 per share. Analysts had been looking for $3.13 per share.

The company also said it now expects free cash flow of $400 million to $500 million, compared with the $900 million to $1 billion it projected in April.

Monsanto Chairman Hugh Grant said the company was revamping its business in glyphosate -- the key ingredient in Roundup -- to price its products closer to generic offerings and streamlining its own products.

Grant specifically cited overbuilt Chinese glyphosate capacity as a factor in “systemic margin compression.”

Monsanto will also accelerate payment on certain distributor and retailer incentives to close out those programs.

“By reducing the uncertainty associated with Roundup, we free Monsanto to grow on its fundamentals,” Grant said. “What matters to our long-term growth is our seeds-and-traits business, which is on track.”

The changes being made to the Roundup business would reduce ongoing earnings contributed by that unit by 50 cents to 70 cents per share for 2010, Monsanto said.

As shares fell, S&P Equity Research on Thursday cut Monsanto to a “hold” from a “buy” and sharply reduced its target price to $55 a share from $84.

Monsanto also on Thursday acknowledged spreading industry concerns about increasing weed resistance to glyphosate, the key ingredient in Monsanto’s Roundup herbicide.

Monsanto said it would create “a simple weed resistance package,” working with U.S. distributors to combine a simplified Roundup brand with other complementary chemicals for better weed control.

Critics said the moves should have been made sooner, and farmers will need to decrease their use of Roundup Ready crops to significantly turn back weed resistance.

“The chickens have come home to roost. It is going to take a number of years to get ahead of these problems,” said Charles Benbrook, chief scientist at The Organic Center and former executive director of the agriculture board of the National Academy of Sciences.

Jefferies & Co analyst Laurence Alexander said it was noteworthy that Monsanto was giving validity to weed resistance concerns and said this issue was likely to recur in the future.

Roundup was once a key profit-driver for Monsanto, and it has continued to generate sales even in the face of generic competition, in part because of its development of “Roundup Ready” crops -- those genetically altered to tolerate treatments of the Roundup weed killer. Monsanto’s Roundup Ready soybeans, for example, have been wildly popular with U.S. farmers.

But as problems with weed resistance have been mounting and generic competition putting downward pressure on prices, Monsanto has seen its herbicide revenue slide.

The company’s agricultural products segment, which includes its Roundup business, reported a 35 percent drop in second-quarter net sales to $642 million from a year earlier.

At the same time, analysts have become increasingly critical of the company’s market moves, chiding Monsanto for taking an arrogant approach in marketing and pricing of both its Roundup herbicide and branded seeds.

Monsanto is also dealing with an antitrust probe by the U.S. Department of Justice and several states related to its pricing and control of the U.S. seed industry.

In afternoon trading, Monsanto’s shares were down 7.5 percent, or $3.76, at $48.90 on the New York Stock Exchange. Its shares are down more than 40 percent from a year ago. (Reporting by Carey Gillam; Editing by Maureen Bavdek and Steve Orlofsky)